If you're faced with escalating credit card debt, you're not alone. A recent report by the Federal Reserve Bank of New York reveals that credit card debt in the U.S. now sits at an eye-popping $856 billion, with the average cardholder owing $6,569. With interest rates on the rise, card payments are only set to take a bigger bite out of your monthly paycheck. Fortunately, there's a way to mitigate the increasing cost of credit card debt while making your payments more manageable. It's called refinancing.
Credit card refinancing is the process of revising or replacing your current debt obligation with a new agreement that offers more favorable terms, including better interest rates. This generally involves a balance transfer, but the same goal can also be achieved by consolidating debt with a loan.
This post walks you through the basic facts and practical details of credit card refinancing so that you can decide whether it's the right approach for you. Whether you're juggling multiple high-interest credit cards, struggling to make minimum payments, or simply want to get ahead on paying off the principal amount. Although we've given you a brief overview, let's begin by exploring the concept of refinancing on a deeper level.
What is credit card refinancing?
Credit card refinancing simply offers consumers an effective way of reducing the interest on their credit card debt by transferring the balance of one or more high-interest cards to a new card with a more favorable pricing structure and better terms. In some cases, credit card companies will offer an introductory interest rate of 0% for anywhere up to 24 months. Interest jumps to standard rates after the promotional period ends (typically between 16% and 20%).
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As you can no doubt surmise, this approach has multiple benefits:
- Save money on interest payments. By locking in an interest rate that's lower than what credit card products usually offer, even if it's for a limited period, you'll pay less on the amount you borrowed.
- Get out of debt faster. With less of each payment being allocated to interest, you can use the savings to pay down your principal over a shorter timeframe.
- Reduce monthly repayments. Opting for a longer repayment term lowers your monthly repayment amount, effectively relieving the strain on your budget. Just beware that you'll likely pay significantly higher interest if this extends beyond the low-interest introductory period, so you'll need to weigh your options.
- Combine multiple credit card balances. Depending on your new card limit, it could be high enough to transfer all existing credit card debt, making your payments easier to track and your debt easier to manage. In addition, you'll have fewer due dates to remember, so you're less likely to miss a payment and incur a penalty.
- Increase your credit score. Your credit utilization ratio could improve since you'll be paying off your revolving debt. As a result, your credit score receives a nice little boost and continues to improve as you make on-time payments.
However, credit card refinancing also has its downsides:
- It can be hard to qualify. Credit card refinancing usually requires a good credit score (670 or above). While there are options for scores starting at around 550 points, you'll be paying more in interest—essentially defeating the purpose.
- Transfer amounts may be limited. The amount of credit card debt you can transfer will depend on the limit of your new card. The result is that you may only be able to transfer a portion of the total balance.
- Transfer costs may apply. Balances can attract a 3% to 5% transfer fee depending on the lender, so you'll need to determine whether it's worth it before shopping around for credit card refinancing products.
- It can temporarily decrease your credit score. A hard inquiry on your credit score can decrease it by five points as with any application. Your score will bounce back, but it might not be ideal if you're simultaneously applying for other credit products and need a high score to qualify.
So, when should you consider credit card refinancing?
Quick and dirty answer: when it aligns with your financial goals.
Although it sounds super appealing, this strategy isn't suited to everyone. You must be able to qualify for a lower interest rate, make your payments on time, manage debt well, and control your spending so that you're not incurring more debt. You should also be able to afford any fees or related costs involved with refinancing.
What about debt consolidation as an alternative strategy for decreasing your interest and obtaining better agreement terms?
Similar post: Does Refinancing Hurt Your Credit?
Credit Card Refinancing vs. Debt Consolidation
Two sides of the same coin, credit card refinancing and debt consolidation, are related strategies that can help you get your credit card situation under control and pay off the money you owe quickly. They just take slightly different paths to reach the same goal.
While credit card refinancing is about transferring high-interest credit card debt to a low-interest card, debt consolidation involves taking out a low-interest loan to roll various debts into a single balance. This can include credit card bills, unpaid medical bills, car loans, student loans, payday loans, and more.
Besides creating one monthly payment, debt consolidation can lower the monthly payment amount, reduce your interest rate, and help you get out of debt faster. As you can see, it's the same outcome as credit card refinancing, but through a different method.
Here's where it may seem complicated:
You can use forms of debt consolidation to refinance your credit card(s). With this in mind, let's look at the most effective refinancing methods.
The Best Ways to Refinance Credit Card Debt
Although credit card refinancing can take on different forms, there are two main ways that encompass most refinancing avenues.
1. Apply for a Balance Transfer Card
Unfortunately, credit card companies don't allow you to pay one credit card with another. On the other hand, a balance transfer card will enable you to move your existing credit card debt over to a new card. Although it's still a credit card, it's specifically designed for refinancing purposes.
Most balance transfer cards have a special introductory period where the annual percentage rate (APR) is 0%. Since you won't be paying interest, your entire payment goes toward reducing your balance on the card. Now contrast this with the average APR of all new credit card offers, which currently sits at 19.55%. Even when the promotional period ends and standard interest rates kick in, the average APR of balance transfer cards is 18.09%. Depending on certain factors, such as a favorable credit score and payment history, that figure could be as low as 13.62%.
The key to succeeding with a balance transfer card is to avoid using it as you would a regular credit card. Once you transfer your high-interest credit card balances, create a budget to pay off the debt. Ideally, you'll do this before the 0% APR phase is over.
Whatever you do, don't start using your newly paid high-interest credit cards again. Instead, decide which ones you'll keep and which ones you'll cancel based on their APRs and repayment terms.
2. Consolidate Debt with a Loan
The second most popular method for refinancing credit card debt is by borrowing money through some type of loan. Of course, the loan needs to have a lower APR than your existing credit cards, and you must have a plan to pay it back.
Although you can use almost any type of loan that meets these criteria, here's a list of the most common options:
Personal loan: The two main types of personal loans available include secured loans that require an asset as collateral and unsecured loans that don't require collateral. Either can be used to finance credit card debt. However, they may involve fees and interest, so comparing shop for the best APR and loan terms is crucial.
Home equity loan: If you have untapped equity in your home, you may be able to take out a loan or refinance your mortgage at a better interest rate. You can then use the proceeds to pay off your credit card debt. This will leave you with one payment for your home loan each month instead of multiple card payments.
Cash-out auto refinance loan: Similar to a home equity loan, you can refinance or borrow against your vehicle if its value is worth more than your outstanding balance. With the loan being secured by your car, there's a good chance you can negotiate a better APR than what your credit card charges.
401K loan: Although it's not the best idea to touch your nest egg, desperate times may call for desperate measures. Borrowing money from your retirement account doesn't involve a credit check, and there's no impact on your score. In addition, you'll be paying interest into your own retirement account, whereas other options mean you'll be paying interest to your lender. Cons can include tax implications if you leave your job and haven't repaid the loan, not being able to earn investment interest on the money you borrow, and not being able to make additional contributions until the loan amount is paid in full.
Life insurance loan: Whole life policies have a cash value you can potentially borrow against. Your policy and its death benefits will then serve as collateral in the event you can't pay the money back. This type of loan doesn't require an application or credit check, so it might be the right option for you if you have a whole life insurance policy and you don't want to ding your credit score.
Whichever option you choose, don't forget to read the fine print. Check for hidden fees and other terms that might rule it out as a viable solution.
If you're wondering how much credit card refinancing can save you in interest, click the link below to launch a popup refinancing calculator and enter the relevant figures to generate an estimate:
The Bottom Line
Making headway on paying off multiple debts is a daunting prospect. Besides managing several minimum payments, you're potentially dealing with different interest rates and monthly dues dates while attempting to pay down the principal. Credit card refinancing can make the process less stressful by eliminating high-interest credit cards and rolling all credit card balances into one monthly payment. If you qualify for refinancing, be sure to do your due diligence to find the best solution to meet your needs.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.