Should you refinance or consolidate your credit card debt?

The answer: It depends. Before you decide, it’s important to understand what each option means.

Let’s start with the basic differences. Put simply, debt consolidation is when you pay off multiple debts with one lower-interest loan. Then, you’ll have only one set regular monthly payment and a fixed repayment term, instead of several different payments to juggle over an undetermined length of time.

Refinancing typically means negotiating new terms for existing debt, whether that means a lower interest rate or a different payment schedule. Transferring a credit card balance to another card with a 0% introductory APR is one way to refinance credit card debt.

If you have lots of high-interest or variable-rate debt, especially if it’s made up of balances on multiple credit cards, a debt consolidation loan could allow you to pay off your debt faster. It could also reduce the amount you pay in interest. But if your debt burden is smaller, it might make sense to refinance instead.

Read on to learn which option is right for you.

What is debt consolidation?

Debt consolidation is a financial strategy that allows you to combine multiple debts into one.

When you have multiple debts in the form of credit cards, store cards, a car loan, medical bills and/or personal loans, you receive several bills each month, often at different times. And your terms and rates likely vary by creditor.

Depending on the type of debt you carry, interest rates could differ (or change entirely if you have an introductory APR), payoff dates could be years or just months away, and paying a debt off early could result in penalties. Each of these variables can make it difficult to plan your payments and manage your finances.

Debt consolidation simplifies how you pay your bills and can help you gain better control of your financial situation.

What are the benefits of debt consolidation?

When you receive a debt consolidation loan from a reputable lender, you can use those funds to pay your creditors directly.

Debt consolidation vs refinancing was contemplated by the couple in the photo, and after researching they were excited to choose credit card debt consolidation with Discover Personal Loans.

Then, instead of managing multiple debt payments each month, you’ll pay just one lender for a set term until the loan is paid in full.

Not only does this strategy make paying off multiple debts easier, it could also offer the benefits of flexible repayment terms and lower interest rates than other forms of debt. In fact, you could potentially save hundreds (or even thousands) of dollars on interest payments when you use a personal loan to consolidate higher-interest credit card or other forms of variable-rate debt—especially in today’s rising rate environment.

Curious about how much you could save? Discover offers a free debt consolidation calculator to help you estimate your savings when you consolidate higher-interest debt.

What is credit card refinancing?

Generally speaking, refinancing is a financial strategy that allows you to receive more favorable terms on a loan. For example, maybe you had to take out an emergency loan during a crisis to cover a major expense. You don’t necessarily have to continue paying the same rate you did when you originally got the loan.

If you have a loan and have been making your monthly payments on time and in full, you might be able to negotiate lower interest rates or a shorter term depending on your specific situation.

It’s important to note that refinancing requires applying for a new loan, which means you don’t have to refinance with your current lender. So be sure to compare lenders, interest rates, and terms to make sure you get the loan that’s best for you.

A balance transfer is one way to refinance credit card debt: You apply for credit with better terms and a new lender and move existing credit card debt to the new card.

Of course, paying off credit card debt with a personal loan is another option to consider. When you use a personal loan to pay off credit card debt, even on just one card, you’re switching from a revolving credit vehicle to a fixed loan amount with a defined repayment term.

Who should consider credit card refinancing?

If you have a balance on a credit card that’s costing you a lot in interest, you might consider transferring the balance to a card with a lower or even 0% introductory APR, which often lasts for 12-18 months.

This strategy could be especially helpful if you believe you’ll be able to pay off the balance completely in that time. For example, a borrower with a $10,000 balance on a card that charges 20% interest could save $2,000 in the first year alone if they switch to a 0% card.

But there are drawbacks to refinancing credit card debt this way.

First, most lenders charge a balance transfer fee of 3% to 5% ($300 to $500 in the example above). Second, introductory periods don’t last forever, and if you’re not able to pay off the balance before the end of that period, you’ll be subject to the card’s standard interest rate. As of summer 2022, the average credit card interest rate was around 17%.*

So, if you have credit card debt that you think you won’t be able to pay off within 18 months, even with a break on interest, it might make more sense to consider a personal loan instead of a balance transfer.

You can apply for a Discover personal loan of any amount between $2,500 and $35,000. With a fixed interest rate and a set regular monthly payment for the life of the loan, you’ll know exactly when you’ll be debt-free.

The bottom line

Both debt consolidation and refinancing can be effective strategies for managing your debt. Ultimately, your personal financial situation should drive your decision.

If you have a smaller amount of credit card debt to manage, it may make sense to consider a balance transfer to a 0% APR credit card. But if you have multiple high-interest or variable-rate debts, combining those bills into one personal loan for debt consolidation can simplify your life and help you pay off debt faster.

Pay off debt up to $35,000 with a Discover® personal loan, a NerdWallet 2021 winner for best personal loan for debt consolidation. Learn More About Debt Consolidation

Need more than $35,000? Check out our low fixed interest rate home equity loan or mortgage refinance options.

*https://www.creditcards.com/news/rate-report/