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Credit Card Refinancing vs. Debt Consolidation: What are the Differences?

Knowing the difference between credit card refinancing and debt consolidation can help save you money in interest and get you out of debt quickly.

Chris Scott

Contributing Writer at Tally

February 10, 2021

A recent study from found that approximately 120 million Americans carry credit card debt. Unfortunately, high-interest credit card debt makes it difficult to pay off your balance in full when you’re making minimum payments. If you find yourself in this situation, you're not alone. 

There are multiple ways for you to pay down credit card debt quickly and efficiently. Today, we'll compare two of the most popular options: credit card refinancing and debt consolidation. We'll outline what each option is as well as compare the expected interest rates, monthly payments and effects on your credit score so that you can determine which is the best option for your financial situation. 

What is credit card refinancing? 

Your credit card carries what's known as an annual percentage rate, or APR. The APR directly impacts how much interest you accumulate on your outstanding credit card balance. The higher your APR, the more interest you are charged. 

Credit card refinancing allows you to negotiate with lenders, such as your current credit card company, for a lower interest rate. Requesting a lower rate from your lender does not harm your credit score, so it's often an effective way to try to lower how much you are paying in interest. 

Many borrowers also refinance through the use of a balance transfer credit card. This allows you to move your high-interest debt from an existing credit card to a card with low interest rates. Often, a balance transfer card comes with an introductory rate as low as 0% for a predetermined period of time — typically six to 18 months. This means that your lender does not charge interest on your balance during this time, giving you a grace period to make debt payments without further repercussions. 

Interest rates 

The interest rates associated with credit card refinancing will vary depending on which method you choose. If you are negotiating with your current lender, you can expect to have higher interest rates than if you were to use a balance transfer card. 

For instance, if you currently carry an APR of 22%, a lender may be willing to refinance your rate down to 15%. However, the interest rates for a balance transfer card typically are between 0% and 5%. 

Based on these interest rate differences, the choice between these options may seem clear. But there are some other details to consider.

For one, you need good credit to qualify for a balance transfer card. If you have poor credit — which may be the case if you've struggled to make minimum payments on your credit cards — then renegotiating your APR may be the best option for your debt management plan. 

The second reason you may avoid a balance transfer card is the balance transfer fee. A balance transfer fee is typically between 3% and 5% of the total amount that you're transferring. So, you could be adding a significant lump sum to your existing credit card debt. If you don't think you can repay the entire balance before the introductory period ends, then taking on extra debt may not be a viable strategy. 

Monthly payments 

You’ll need to make a monthly payment with either credit card refinancing option. Even if you have a balance transfer card that offers no interest, your lender will still require a minimum monthly payment. 

In addition, if you miss just one payment on a balance transfer card, you will likely trigger a penalty APR. Penalty APRs are significantly higher interest rates, often upward of 25%. There will also be fees applied since you broke repayment terms. 

So, even though you may have a card with low rates, you'll want to make sure that you avoid taking on new debt by making timely payments each month. 

Effects on credit score 

If you have an existing credit card, there's no harm in asking your lender to reevaluate your APR. It will not harm your credit score, so there are no real repercussions associated with doing so. 

If you elect to use a balance transfer card to refinance your interest rates, you are going to need to open a new credit card. In most cases, doing so requires lenders to look at your credit history by performing a hard inquiry on your credit report. This will cause your credit score to dip, but it should be a short-term thing, especially if you make on-time payments. 

What is debt consolidation? 

Debt consolidation occurs when borrowers take out a personal loan to pay off debt. This most often applies to high-interest credit card debt but could also be appropriate for a student loan or car payment as well. The debt consolidation loan comes with a lower interest rate than credit cards. There are two primary loan options that borrowers often use to pay off their credit card debt: a home equity loan and an unsecured personal loan. 

​A home equity loan is available to those with: 

  • Equity in their home 

  • Steady income

  • Good to excellent credit 

With a home equity loan, you use the equity you have in your home as collateral. The loan amount is relative to your property value, determined by an appraiser appointed by the lender. 

An example of someone who may consider using a home equity loan is a person who is financially healthy but recently had to put medical bills on their credit card. Instead of carrying these bills on high-interest credit cards, the borrower can use a home equity loan to make lower monthly payments. 

The other debt consolidation option is an unsecured personal loan. This type of loan often comes with more stringent loan terms, such as higher interest rates, because a borrower is not offering collateral to back the loan. But, consolidating with a personal loan can still save you a considerable amount when compared to the cost of high-interest credit card debt. 

Interest rates 

The interest rates for a debt consolidation loan typically range between 5% and 12%, but a home equity loan often has a lower interest rate than an unsecured personal loan. There are no promotional APRs. But there are also no variable rates either, so the lender cannot change the rate. You are locked into that rate for the life of the loan. 

Let's say, for instance, that you are carrying credit card debt on the following three cards: 

  • Card one has a 22.99% APR and a $5,000 balance.

  • Card two has a 23.99% APR and a $4,000 balance. 

  • Card three has a 14.99% APR and a $1,000 balance. 

If you were to pay $200 every month, it would take you more than 14 years to pay down these cards. 

Instead, you take out a personal loan with a 10% interest rate and a five-year term. You use the $10,000 from the loan to immediately pay off your existing credit card debt. Under this scenario, your fixed monthly payment on the loan is $212.47 per month. Though you have the option to pay more, if you pay the fixed amount, you will have the loan paid off in five years. This is less time than it would take you to pay off your credit cards

Monthly payments 

The monthly payment requirements are spelled out in your loan terms. A debt consolidation loan may better suit your personal finances because it carries a fixed interest rate. This means that the amount you pay every month is the same, making it easier to plan into a budget. Even if you only make the minimum payment, your lender will not charge you additional interest. 

Effects on credit score  

A lender is going to need to perform a hard inquiry into your credit history to determine your eligibility for a loan. This may cause a short-term drop in your credit score.

Making your new loan’s minimum monthly payment on time will improve your credit score. However, if you miss a payment or two, you risk defaulting on your loan. This will harm your credit score significantly. It also allows your lender to take you to collections to try to recoup the money he or she is owed. If you have a home equity loan and miss monthly payments, you risk losing your home. 

Other options to pay down debt

Another option available to borrowers to pay down debt is a credit card payoff app like Tally. Tally gives you a low-interest line of credit and uses it to automate your credit card payments. It pays off your debt in the most efficient way possible, reducing how much you pay overall in interest while expediting how quickly you pay off debt. 

Tally follows the debt avalanche method and pays your highest APR cards first. All you have to do is make a single monthly payment to Tally. Tally offers APRs ranging between 7.9% and 25.9%, with the best rates reserved for those with good credit. Tally does not have any: 

  • Annual fees 

  • Origination fees 

  • ​Late fees

  • Prepayment fees

  • Balance transfer fees 

While other debt consolidation options require more hands-on management, Tally automates the debt payment process, giving you peace of mind knowing that your debt is being paid down as quickly as possible. 

Credit card refinancing vs. debt consolidation: Which is best for you?

So, which option is right for you? If you are strictly looking to lower the interest rate on your existing credit card balance, then you may want to consider refinancing. 

However, if you're looking for a more straightforward approach to paying off your balances, you'll want to consider a debt consolidation loan. These loans offer fixed monthly payments and interest rates, though it may take you a few years to pay down your debt. 

If neither a credit card refinance or debt consolidation loan interests you, consider using a credit card payoff app like Tally instead. Doing so will allow you to pay down your debt in the most efficient way possible, getting you out of debt so that you can save money for retirement or future savings.


Disclosure: To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.9% - 25.9% per year. The APR will vary with the market based on the Prime Rate. This information is accurate as of January 2021. Tally Technologies, Inc. NMLS # 1492782. Loans made or arranged pursuant to a California Finance Lenders Law License or other laws in your state.