4 Ways To Refinance Credit Card Debt
10 MIN READ
Published June 27, 2023 | Updated September 25, 2023
Credit card refinancing is available in many forms, but they all have the common goal of lowering your interest rate to make it easier to repay debt. Some of the most common ways to refinance credit card debt are personal loans, balance transfer cards, borrowing from your retirement account, and home equity loans. The right option will depend on your finances, the amount of debt you have, and your credit history.
Refinancing Credit Card Debt
Getting out of high-interest credit card debt can seem challenging, but you can choose from several options to help you. One such option is to refinance credit card debt at a lower rate of interest.
When you refinance credit card debt, you're looking for ways to pay off high-interest debt at lower rates. Although paying off your credit card balance in full at the end of each month is important, life can get in the way. A total of 65% of American credit card holders do not pay off their balance in full, and 46% of those people say that it would take them over a year to pay off the balance in full.
If you don’t want to damage your credit or make your debt worse, consider solutions such as refinancing options, debt consolidation loans, or debt settlement. Before you decide on the right solution to pay off your debt, it’s important to understand the pros and cons of each option.
When to Refinance Credit Card Debt
Refinancing may be a good option if you need help making monthly payments. If you carry a lot of credit card debt at a higher interest rate, looking into low-interest refinancing options might be a good idea.
For example, borrowing through a credit card with a 24% APR may make it difficult to pay off your debt. If you transfer your debt to a personal loan with a 12% interest rate, you’ll save a considerable amount of money on interest charges and have an easier time clearing your debt.
Teresa Dodson, CEO and Founder of Greenbacks Consulting, offers this advice: “Balance transfers for a 0% or very low interest over time is a great option. This can help you pay off your debts faster." However, Dodson warns, "You should never take unsecured credit card debt and refinance with something that’s secured.”
Reasons to Consider Before Refinancing Your Credit Card Debt
Here are some of the factors to consider when choosing to refinance your credit card debt:
It may be a good idea for you to refinance your credit card debt if:
- You can make payments each month.
- You have a good credit score.
- You have a plan in place to stay out of debt.
Refinancing may not be a good idea if:
- You struggle to pay credit card bills on the due date.
- You often exceed your credit limits.
- Your credit score is low.
- Your credit utilization could be better.
- You’re not sure if you’ll be able to pay off your debt.
Even if refinancing is not suitable, there are many debt relief options to explore, such as debt settlement, debt consolidation, and debt management plans.
Should You Refinance Credit Card Debt for a Better Financial Future?
If you have accumulated a lot of credit card debt at a high-interest rate, you may need help to pay off that balance in full each month. When you don't pay in full, the unpaid balance continues to accrue interest, and your balance keeps increasing.
If you make late payments or are only able to make the minimum payment, you’ll accumulate late fees, and debt can snowball quickly to become unmanageable. Taking concrete steps to tackle that debt by refinancing your credit card debt will help you save money on interest and give you the peace of mind you need.
4 Options for Refinancing Credit Card Debt
There are several options available to refinance credit card debt. Options like balance transfer cards are available at a lower interest rate but are considered revolving credit. Loans are also available at lower APR, but they provide you with a fixed payment structure and a specific timeframe to pay off your debt. The best option will be the one that helps you save money and works effectively for your financial situation.
1. Personal Loans
Personal loans may be a good option if you have a credit score of 660 or more. You can still qualify for a personal loan with a lower credit score, but the interest rate will be higher. Since credit cards are unsecured debt, you won’t need to put up any collateral.
The application process for a personal loan is fairly easy and can be done online. Applications are typically approved in one business day by financial institutions. You’ll need to pay your installment on time every month to keep your credit in good shape.
Personal Loan Pros:
- Fixed interest rate and payment each month
- An unsecured personal loan does not require collateral
- Payments can be made on autopay, so you don’t miss payments
- Fixed time period to pay off your new loan
Personal Loan Cons:
- Interest rates can be high if your credit score is lower
- Can increase your overall debt if you're still using credit cards after refinancing
- Prepayment and other fees can make the cost of borrowing higher than expected
2. Balance Transfer Cards
When you transfer your existing balance from high-interest credit cards to a balance transfer card, you can qualify for a 0% interest rate for a specified amount of time. That means you won’t have to pay any interest on your balance. Any payment you make during that introductory period will go entirely toward the principal, which helps you pay off the loan faster.
Typically, credit card companies offer an introductory period of 12 to 18 months. They might also charge a fee based on a percentage of the amount you transfer, so it's important to account for that cost. Generally, you’ll need excellent credit and a credit score of 700 or more to qualify for balance transfer cards.
Balance Transfer Pros:
- 0% interest rate when you transfer your balance from another card
- Easy and quick to apply and qualify for
- Offers the potential to save a lot on interest charges
Balance Transfer Cons:
- Introductory period is only for a limited time
- Not available to those with bad credit
- Transfer fees charged by card issuers may increase the overall cost
3. Home Equity Loan
If you own a home and have built up equity, another option to refinance credit card debt is through a home equity loan. The loan amount will depend on the difference between the current market value of your home and the balance due on your mortgage.
Home equity loans come with fixed rates, while home equity lines of credit (HELOCs) are usually at variable rates. Interest rates tend to be quite low, especially if your credit report is good and you have a history of repaying your mortgage.
- Higher equity may qualify you for a larger loan
- Fixed payments each month
- Lower interest rates
- Closing costs may make borrowing more expensive
- Risk of foreclosure if you miss payments
4. Borrowing from Your Retirement Account
You can also refinance your credit card debt by borrowing from your retirement account. You can take a loan against your 401(k) to pay off your credit card debt. This type of loan allows you to borrow money and then pay it back over time with interest. The funds you pay back are then deposited back into your retirement account.
If you make a withdrawal, the money is permanently removed from your retirement savings, and you're assessed penalties and extra taxes. While the money is easily available, this should be your last option because you’ll miss out on potential growth in your investments.
Retirement Account Pros:
- Easy and quick process
- Lower interest rates
- Does not impact your credit
Retirement Account Cons:
- You’ll need to pay back the loan quickly if you leave your job
- Your employer may not allow it
- Reduces growth on investments
Tips for Refinancing Credit Card Debt
After considering all the pros and cons, if you think refinancing is the best option for you, it's important to compare lenders to find the lowest interest rate possible. Here are a few more tips to consider:
Refinance Credit Card Debt with a Reputable Lender
Think about the long-term implications of your financial decision before you choose to refinance your debt. Take the time to compare your options to ensure that you can afford the monthly payments.
Work with a reputed lender and ensure you don’t jump into something that seems too good to be true. If you have an account at a credit union or a local bank, start there. Get quotes from at least three lenders so you can compare loan terms and find the best credit card or loan that meets all your needs.
Refinance Credit Card Debt with No Fees
Balance transfer fees and prepayment penalties may make the cost of borrowing higher. In some cases, these extra fees may negate any benefit you get from refinancing. Research to find lenders that may offer balance transfers with no fees. You may have the opportunity to negotiate with a lender to remove certain fees, such as prepayment penalties. If you have a good credit score, you may be in a better position to negotiate.
Risks of Refinancing Credit Card Debt
While there are plenty of benefits to refinancing your credit card debt, it's important to consider the risks so you can weigh your options and make an informed decision.
- You may incur fees. Refinancing may come with certain costs, such as loan origination fees, balance transfer fees, and prepayment penalties.
- You may increase your debt. Once you've paid off your credit cards, if you continue to rack up charges, you may end up owing even more. Consider getting help with spending and money management through credit counseling if you want to avoid further debt.
- You might lower your credit score. Lenders may perform a hard credit inquiry when reviewing a loan application. This credit check may lower your FICO credit score. Also, if you miss payments after refinancing, your credit can take a hit from which it may be difficult for you to recover.
Can I Refinance with Credit Card Debt?
If you have existing debt on your credit cards, you may still have the chance to refinance depending on several factors, such as your credit score and repayment history. If you have a significant balance but have managed to make payments on a timely basis, your credit score may still be good enough to qualify for a refinance loan at a lower interest rate.
However, if you've already missed credit card payments multiple times and your credit score is quite low, you may have to consider other debt relief solutions. If you have multiple credit card accounts, opting for a credit card consolidation loan may be a better choice.
Refinance Your Credit Card Debt Today
Credit card debt refinancing is an effective financial tool that can help you manage your debt and pay it off more easily. Instead of letting your balance increase on high annual percentage rate credit cards, take action so you can start paying it off and get out of credit card debt sooner.
Next Steps for Credit Card Debt Refinancing
Refinancing your credit card debt means taking out a loan or transferring your balance to a lower-interest-rate credit card to pay off your existing debt. Personal loans and 0% APR balance transfer cards are two popular ways to do that. Both of these options are good if you have a good credit score and are confident that you’ll be able to pay off the loan on time.
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