Credit Card Refinancing: Debt Consolidation vs. Balance Transfers
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Credit Card Refinancing

If you are looking to refinance your credit card debt, a debt management plan from InCharge Debt Solutions can lower your interest rates and combine your bills into one easy to manage payment.

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 2019 is 17.76%. Those with bad credit can expect rates of 28%-30% or even higher.

According to the Federal Reserve Bank of New York, delinquency rates hit a seven-year high in the first quarter of 2019, mainly because borrowers in their 20’s were struggling to keep up with minimum payments. Total household debt is also on the rise, hitting $13.67 trillion in Q1 of 2019. That is an increase of $993 billion since 2008.

This means more-and-more people are amassing more-and-more debt without a clear plan on how to repay it.

It’s no secret that high balances on credit cards makes them harder to pay off. 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 the debt 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 three ways to go about this:

  1. Balance credit card transfers
  2. Nonprofit debt consolidation through a debt management plan
  3. Debt consolidation loan from bank, credit union or online lender

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, no matter how dismal your credit score.

How Balance Transfers Work

A balance transfer moves the debt from one or multiple credit cards to a new one with lower interest rates.

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 between 12 to 20 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 14%-24%.

If you don’t pay off your balance, or fail to at least put a dent in it, you may 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, 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 won’t make sense if you have bad credit, as the interest rates will rival or exceed the rates on your credit cards. That is, 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 all your credit card debt into one pool. The nonprofit agency acts as a middleman between you and your creditors. They can negotiate a deal to cut your interest rates to 8%-9%, sometimes even lower and arrive at an affordable monthly payment for you.

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.

A debt consolidation loan only makes sense if the interest rate of 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.

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 devise 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)

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 four or five balance transfer credit cards at once can devastate 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.

Sources:

Alix, L. (2019, May 14) What’s behind the rise in credit card delinquencies. Retrieved from https://www.americanbanker.com/news/whats-behind-the-rise-in-credit-card-delinquencies

Manning, B. (2019, May 14) Total Household Debt Rises for 19th Straight Quarter, Now Nearly $1 Trillion Above Previous Peak. Retrieved from: https://www.newyorkfed.org/newsevents/news/research/2019/20190514

NA. (2019, May) QUARTERLY REPORT ON HOUSEHOLD DEBT AND CREDIT. Retrieved form: https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2019Q1.pdf

NA. ND. Terms of Credit at Commercial Banks and Finance Companies. Retrieved from: https://www.federalreserve.gov/releases/g19/HIST/cc_hist_tc_levels.html

Carrns, A. (2019, July 5) How to Manage Your Credit Card Bills, Which Experts Say Are Late More Often. Retrieved from: https://www.nytimes.com/2019/07/05/your-money/credit-cards-late-payments.html

Dilworth, K. (2019, July 3) Rate survey: Average card APR remains at record high of 17.76 percent. Retrieved from: https://www.creditcards.com/credit-card-news/rate-report.php

White, A. (2019, July 1) Credit Scores That Get Balance Transfer Credit Cards. Retrieved from: https://www.magnifymoney.com/blog/balance-transfer/credit-score-balance-transfer824575760/