Credit cards can accrue incredible additional fees in interest on top of the balance due, creating a tremendous financial burden of a great deal more than you should owe. The suggestion for credit cardholders is to keep balances as low as possible to repay balances as the invoices come due each month.
But in the current economic landscape and inflation rates, many people use their credit cards to help afford daily expenses and monthly obligations. The balances are ongoing in these circumstances, with a need to carry them from month to month.
That means the interest compounds and accrues, creating much larger balances than users initially started. And if you have more than one card, you can slowly decline into high-interest debt cycles, finding it difficult to break free.
A couple of things many people consider are either kredittkort refinansiering (credit card refinancing) or debt consolidation. These have distinct differences. Not everyone is aware of how they differ, or which would be better for their specific circumstances.
Let’s look at each to learn the advantages and downsides of the two to allow greater insight for you to make the most informed decision.
What Are The Differences Between Credit Card Refinancing And Debt Consolidation
Credit card debt can accrue rapidly when carrying a balance from one month to the next. Financial experts suggest keeping the balance within a range so you can repay that amount when the invoice comes due each month.
The inflation rates and the threat of a recession make it difficult for people to maintain their monthly obligations without a bit of help from credit cards.
Often that means exceeding what can readily be repaid, making it necessary to carry the balance to the following billing cycle. With that comes compounding interest that grows exponentially above where the original balance started.
This results in debt cycling. With one card, that can be a challenge, but with more than one card, it can be stifling. The options available to cardholders include refinancing the high-interest debt or consolidating it.
These often need clarification but have distinct differences. Go here to discern between credit card refinancing and debt consolidation, and then we’ll look at each individually.
· Debt consolidation
When consolidating debt, the objective is to take out a personal consolidation loan from which the funds will be used to repay the credit card balances. The loan will then have monthly repayment installments to be repaid, totaling these amounts into a single repayment until the balance is repaid.
Often, personal loans will carry a lower interest than most credit cards. With lower interest, it could be possible to repay higher installment amounts to repay the loan faster, so the debt is eliminated rapidly.
The priority is making sure the loan you obtain doesn’t have fees attached like a prepayment penalty. This can be an exorbitant charge for repaying the loan ahead of schedule. Not all providers charge this fee, but it’s important to make sure when comparing lenders that this is not included as one of their fees.
· Credit card refinancing
Credit card refinancing typically involves transferring the balances from your high-interest credit cards to one card that offers a promotional rate, usually 0 percent APR for a designated time frame with a credit limit high enough to handle your balances.
That will allow one repayment with no interest for roughly 12-24 months. These promotional cards can save a considerable amount of money, but you often need excellent credit to be eligible for the card. Additionally, it’s critical to be able to repay the balance within the introductory period.
If you carry the balance beyond the deadline, standard (high) interest will kick in immediately, which usually becomes retroactive to the date the card was activated. That can mean the money you saved will be lost. You’ll essentially start again, albeit with one payment instead of multiple.
What Are The Advantages Of Credit Card Refinancing
Credit card refinancing is comparable to debt consolidation in that you can repay existing credit card debt by transferring the balances to a single credit card allowing for one designated monthly minimum repayment, one interest rate, and a set due date instead of multiple due dates and repayment amounts.
This makes managing the debt much more straightforward and simpler. Again, if there is a promotion, the debt must be repaid within the specified time period, or interest will be attached after the deadline is reached and the balance is carried over.
The interest attached will usually fall into standard rates associated with most credit cards. Consider these advantages and a few downsides related to credit card refinancing.
1. A low introductory offer
Usually, a low introductory offer is attached with balance transfer cards, sometimes as minimal as 0 percent APR. That means the monthly installment will go directly towards the balance for roughly a 12-24-month period.
2. A credit limit to encompass all the high-interest debt you have
It could be possible to obtain a balance transfer card with a high credit limit to contain the entirety of your high-interest debt.
Still, it’s important to remember that whatever charges you transfer to the card need to be repaid within the set time frame to avoid interest being attached after the deadline has been reached.
If you think it’s too ambitious to repay what is a significant amount, keep it within reason. You can always do it again once these are repaid.
3. You’ll need a good credit score
Usually, to get a 0 percent APR balance transfer credit card, you need an excellent credit rating. But that doesn’t mean you won’t be eligible for a lower-interest introductory offer that you can use to transfer the other cards.
These will still allow a single repayment with less interest than what you’re repaying with all the other ones individually.
Consider whether you should refinance your mortgage to repay credit card debt – you can review that option at https://www.equifax.com/personal/education/credit-cards/refinancing-mortgage-repay-credit-card-debt/.
1. Balance transfer fees need to be considered
One downside to be made aware of is the balance transfer fees that will be charged for the amounts you transfer to the new credit card. These can range as high as 5 percent. You’ll have to calculate whether the money you save will be worth paying this fee.
What Are The Advantages Of Debt Consolidation
With debt consolidation, an unsecured personal loan is obtained with the lump sum funds used to repay the balances. This leaves you with a fixed interest rate to be paid in equal, set monthly repayment installments for a designated period, one bill each month.
But, again, there are advantages and some downsides to this scenario also. Let’s learn.
1. The interest rate and monthly installments will not change
With an unsecured personal loan, the interest rate is usually fixed with set equal monthly installments for the life of the loan. You will know the term date and be able to budget predictably, allowing exceptional management of your monthly obligations.
2. Debt consolidation loans generally come with lower interest compared to credit cards
Over the life of the loan, you’ll save considerable money since the interest is lower than what you would have paid with the high-interest credit cards that you would have continued to pay for an indeterminant period.
3. These are unsecured loan products that do not require collateral
You won’t need to put up a valuable asset to back the funds with the lender. An unsecured loan doesn’t require collateral, merely a signature promising you’ll repay the loan’s balance.
If the loan goes into default, there are recovery tactics the lender can pursue so you won’t be entirely off the hook, meaning it’s vital to make the repayments timely and consistently.
1. Continuing to create debt can put you in a worse situation
If you consolidate your debt into an unsecured personal loan and continue to use credit cards, you can put yourself in a worse situation than you were before taking the loan.
The problem will be if a lender is willing to help you break free from the situation again when witnessing how the circumstances unfolded following the first loan.
How do you know which is the right option for you? Crunch the numbers to see where you’ll save the most money in the long run before committing. The priority is making sure you can make the repayments and do so timely and comfortably.