Credit Card Refinancing

About Credit Card Refinancing

Interest rates are never as low as we’d like — or sometimes need them to be – but credit card refinancing is one step consumers can take to make their interest rates on credit cards more favorable.

A credit card with 15% interest may sound good for a while, until you overhear your co-worker bragging about how he paid off a hunk of debt with the help of his 0% APR credit card.

Truth be told, 15% interest rests on the low end for credit card APR. The average APR for a credit card in September of 2020 is 16%. Those with bad credit can expect rates of 28%-30% or even higher and that is where refinancing your card can really help.

According to the Federal Reserve Bank of New York, delinquency rates hit a eight-year high in the first quarter of 2020, mainly because borrowers in their 20’s were struggling to keep up with minimum payments. Total household debt is also on the rise, hitting $14.27 trillion in Q2 of 2020. That is an increase of $1.593 trillion since 2008.

This means millions of Americans are amassing an exorbitant amount of debt without a clear plan on how to repay it.

If you’re unable to pay your credit card bill this month, you could be smacked with a penalty APR as high as 26% next month, making it that much harder to crawl out of the hole.

In short, missing credit card payments is a quick way to find yourself trapped in a cycle of debt. Credit card refinancing is one way to break free of this cycle.

What Is Credit Card Refinancing?

Credit card refinancing cuts your interest rates by either transferring the debt from multiple credit cards to a single credit card with a lower interest rate or consolidating your credit card debt into one monthly payment through debt consolidation.

There are five ways to go about this:

1. Balance credit card transfers
2. Nonprofit debt consolidation through a debt management plan
3. Debt consolidation loan from a bank, credit union or online lender
4. Loan from a 401k plan
5. Home equity loan

The option right for you depends largely on your credit score. Those with poor credit scores, for instance, won’t qualify for balance transfer credit cards and may struggle to get a debt consolidation loan they can afford. On the other hand, nonprofit debt consolidation is always an option because your credit score is not a factor.

How to Refinance Credit Card Debt

When you refinance credit card debt there are a few common ways to do it:

• Apply for a new credit card with a lower interest rate
• Be approved for balance transfer credit card
• Apply for a personal loan to pay off the debt.

A balance transfer moves the debt from one or multiple credit cards to a new one with 0% APR for a specified period of time. You continue making payments on the new card until you have settled your debt.

A personal loan, also known as a debt consolidation loan, involves applying to a lender for a loan large enough to pay off your credit card debt in full. The incentive is that the interest rate on the loan is much lower than the credit card.

» Learn More: Balance Transfer vs Personal Loan

Refinance Credit Card Debt with a Balance Transfer

Many credit cards offer balance transfer rates at 0% APR to reel in new, hopefully long term, customers. There also could be a transfer fee of 1%-5% of the balance owed, which means you’re adding to your debt, so factor that into your decision.

The 0% introductory rate usually lasts 12-18 months. This means you have a limited amount of time to reap the benefits of interest free debt. When the introductory window closes, you’ll be subject to a standard APR that can range between 18%-24%.

If you don’t pay off your balance, or fail to at least put a dent in it, you will wind up right back where you started.

Quick word of advice if you get a 0% balance transfer card: Do not make new purchases with it!  You’ll be charged interest on anything you buy, unless your card comes with a promotional rate of 0% APR on purchases.

So, if you buy a $500 dishwasher with your new card, you’ll be charged interest on that $500. If you really need a new dishwasher, stick to debit card, cash or, if it’s urgent, a different credit card.

You should be wary of stacking debt onto your new credit card, even if it does come with a low rate on purchases. Remember, the only reason you got this card in the first place was to rid yourself of debt, not add to it.

Refinancing Credit Card Debt Through Debt Consolidation

Debt consolidation can slash your APR, while also providing the convenience of a single, easy to manage monthly payment.

There are two paths for refinancing credit card debt through debt consolidation. One is nonprofit debt consolidation, and the other is a debt consolidation loan. The best option (you guessed it) depends largely on your credit score.

A debt consolidation loan with bad credit won’t make sense if the interest rate  rivals or exceeds the rates on your credit cards. And that’s if you’re able to qualify for the loan in the first place.

The good news is anybody can qualify for nonprofit debt consolidation.

Nonprofit Debt Consolidation

Nonprofit debt consolidation places debt from multiple credit cards into one pool. The nonprofit agency acts as a middleman between you and your creditors. The agency has agreements with card companies that cut your interest rates to 8%-9%, sometimes even lower. That allows you to arrive at an affordable monthly payment.

Your job is to make a single, monthly payment to the agency, who’ll then make sure that money gets to each of the card companies in an agreed upon amount. Nonprofit debt consolidation constructs a clear way out. When the process is over, you’ll be free from credit card debt.

Debt Consolidation Loan

A debt consolidation loan is an unsecured personal loan you take out to pay off debts. This option works if you have a good or excellent credit score, which is rarely the case.

A debt consolidation loan only makes sense if the interest rate on the loan beats the rate of the credit cards you’re trying to pay off. A good credit score can fetch you rates at 11%. Even with a fair credit score, this option is worth considering if the rates offered are low enough.

The nice thing about a debt consolidation loan is that interest rates are fixed so you won’t have to worry about fluctuating monthly payments. You’ll have the same payment to make every month until your debt is repaid, which usually is 3-4 years.

Credit Card Refinancing vs. Debt Consolidation

Credit card refinancing and debt consolidation are similar in that they both serve the purpose of paying off a debt and lowering the interest rate. When you refinance your credit card you can negotiate with the credit card company about lowering your interest rate so you can afford your payments. If they don’t budge, then you find a new credit card company with a lower interest rate and pay off the remaining balance on the high interest credit card.

Debt consolidation involves taking out a personal loan from a bank to pay off all your credit card balances in full. This is done with the incentive that you would be paying much less in interest on the personal loan than the interest with the debts owed to the credit card companies.

So, which is a better option? That is for you to decide. There is a reason you have options when paying off your debt. Your best bet is to go with whatever option provides the least amount of interest and fees.

Balance Transfer vs Debt Consolidation

You’ll want to conduct your fair share of research when deciding between a balance transfer and debt consolidation. Compare the cost of fees and interest rates of a balance transfer or debt consolidation to the interest you’re paying now.

It may be wiser to boost your credit score up a bracket before going through with one of these options. Nonprofit credit counseling can help you create the kind of budget you need to point you toward a healthy credit score.

Here are the typical fees, interest rates and credit score requirements associated with balance transfers and debt consolidations:

Nonprofit Debt Consolidation

Fees: $25-$50/month

Interest Rate: 8%-9%

Credit Score Requirement: none

Debt Consolidation Loan

Fees: 1%-8% of total loan amount

Interest Rate: 5%-36%

Credit Score Requirement: 630-850

Balance Transfer

Fees: 1%-5% of amount transferred

Interest Rate: 0% for 12-20 months

Credit Score Requirement: 580-850 (realistically, 650 or above)

Refinancing Credit Cards by Taking Out a 401k Loan

So, you’re considering borrowing from your 401k to pay off credit card debt? This is a risky strategy that should be well researched.

One positive from taking out a 401k loan is that it does not affect your credit score. The other benefit is it has better interest rates than an unsecured personal loan.

But 401k loans should only be used as a last resort. The penalties and fees associated with taking out and not being able to repay the money far outweigh any benefit associated using a 401k loan to pay off credit card debt.

Taking money out of the 401k fund will reduce your retirement and set you back financially several years as you inch closer to retirement age. And if you lose your job, the balance of the 401k loan is due within 60 days of termination.

Refinance Credit Cards by Taking Out a Home Equity Loan

If you’re in financial distress and have equity in your house it may be beneficial to consolidate debt with a home equity loan.

Before you even consider taking out a home equity loan, you must have equity on the house you own. Equity is the difference between what you owe on a home and what it is worth on today’s market.

You can borrow against that difference and repay it at a fixed rate that should be lower than what you’d pay on a new credit card or unsecured personal loan. This loan is tied to your house, which serves as collateral.

However, if you miss payments, the lender can take the house. The other negative aspect of a home equity loan is that it prolongs the amount of years it will take to pay off your house.

Consider Enrolling in a Debt Management Plan

Enrolling in a debt management program could be the solution that is easiest to handle. You and a nonprofit credit counseling agency consolidate your debts from multiple credit cards and pay them off at a significantly reduced interest rate.

The agency acts as a middleman between you and the creditor. You pay the agency each month and they take care of paying off the debt owed to the creditor. This takes away the hassle of trying to pay off multiple credit cards with multiple due dates.

Does Refinancing Credit Cards Hurt Your Credit?

Possibly. It depends on how you go about it. However, most of the damage credit card refinancing may inflict on your credit score can be avoided or reduced.

You agree to a hard credit inquiry whenever you apply for a new loan or credit card. One hard inquiry lowers your credit score by a few points. No need to sound the alarms just yet, we all go through hard inquiries at some point or another. Catastrophe occurs when you apply for multiple lines of credit in a short period of time. Applying for multiple balance transfer credit cards at once can lower your credit score before you’ve even been approved.

Do your research before applying, and only apply for one card.

Another thing to remember is that opening a new credit card will lower your average account age, which makes up 10% of your credit score. You can offset this by keeping your old credit card accounts open, even after clearing their balances.

Lastly, aim, if possible, for a balance transfer card with a higher limit than you need. If you have $2,000 in credit card debt, your ideal balance transfer card would have a $6,000 limit. This is because you want to keep your credit utilization rate (which affects 30% of your credit score) as low as possible. A good rule of thumb is use only 30% of your available credit, or less.

Is Refinancing Credit Card Debt a Good Idea?

Yes. Refinancing credit card debt is a good idea if you’re with high interest credit card debt. The benefit of paying 11% interest on the debt versus 20% can add up to thousands in savings over time. Combing through the options and finding what best suits your financial situation can take time, but you must start somewhere.

Consider speaking with a nonprofit credit counselor to discuss what options will be best for you to alleviate and ultimately extinguish your credit card debt.