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:
- Balance credit card transfers
- Nonprofit debt consolidation through a debt management plan
- 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: