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:
- Balance credit card transfers
- Nonprofit debt consolidation through a debt management plan
- Debt consolidation loan from a bank, credit union or online lender
- Loan from a 401k plan
- 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.
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:/vc_column_text]