So, you have credit card debt. You’re not the only one. Credit card debt continues to be at an all-time high in the United States, totalling a balance of $1.2 trillion as reported by the Federal Reserve Bank of New York.
Still, you shouldn’t just accept your debt and become complacent. Many Americans hold onto debt for too long, not understanding the true consequences of debt or how to get rid of it. For example, an Experian study found that 40% of Americans in credit card debt believe that making the minimum payment is enough for debt management.
Unless you’re proactive about tackling your credit card debt, it will accumulate and follow you for years.
During this current climate of exceptionally high interest rates, getting rid of debt as quickly as possible is important. One solution for your credit card debt might be refinancing.
Continue reading as we share more about credit card refinancing and determine whether it’s the right choice for you.
What is Credit Card Refinancing?
Credit card refinancing involves taking the balances of your credit card debt and renegotiating them into a new loan. People typically refinance credit card debt to secure a lower interest rate.
You can refinance with your existing credit card provider or transfer to a new lender.
A refinance is essentially taking out a new loan. You apply for a new loan and use the funds to pay off your existing loan.
Credit Card Refinancing Options
There are a few ways you can approach refinancing credit card debt
1. Balance Transfer Credit Card
Balance transfer credit cards exist so consumers can transfer an existing credit card balance to a new credit card. Usually, these cards offer a 0% interest rate for a promotional period. A typical promotional period on a balance transfer card ranges from three months to a year.
This promotional period allows you to temporarily stop paying interest, enabling you to decrease your principal balance faster.
Pros
The advantages of a balance transfer card are:
- A period when you have a 0% interest rate
- Often easy to secure, even with poor credit
Cons
Sounds too good to be true? There are a few catches you should know about balance transfer cards:
- You are charged an upfront fee for transferring your balance, usually between 1% and 5% of your total balance. Calculating this fee in your overall assessment is essential to ensure you’ll still come out net positive even after paying this charge.
- Once the promotional period is over, your interest rate might be higher than that of your current credit card. For example, if your current credit card’s rate is 22%, your balance transfer card might offer 0% for 6 months, after which the rate is 28%. If this is the case, you’ll want to pay off most or all of your debt during the promotional period.
- You might incur more debt. Knowing that you have a 0% interest rate could tempt you to go back to overspending, slowing down your debt repayment progress.
2. Personal Loan
You can refinance from revolving credit (credit cards) to installment credit (loans). By taking out a personal loan, you commit to an interest rate and make the same monthly payment on a fixed schedule.
Pros
Some of the benefits of refinancing to a personal loan are:
- The interest rate should be lower than that of your credit card
- You’ll know your exact payment every month, so it’s easy to budget
- You know when your debt will be paid off based on the loan term you choose
- Usually, personal loans are unsecured, so you don’t have to have collateral
Cons
- You need a strong credit score, usually of at least 580
- There might be prepayment penalty fees
- With your credit cards paid off, you may be tempted to start using them again and accrue more debt
3. Home Equity Line of Credit (HELOC)
If you own property, you can open a home equity line of credit (HELOC). A HELOC uses the equity in your home to give you access to funds. Since the property secures the loan, the lender incurs less risk and can offer a lower interest rate.
Pros
Using a HELOC to pay off existing credit card debt pros are:
- A HELOC will likely have a lower rate than a personal loan
- You can pay back your HELOC as quickly as you’d like, without prepayment fees
- You’ll have fixed payments, so you know what to expect
- You have an end date for the payments
Cons
Some of the disadvantages of a HELOC are:
- You usually need a credit score of 660 or higher for a HELOC
- If you get behind on payments, you risk losing your home
- Getting a HELOC comes with some upfront fees
Will Credit Card Refinancing Hurt My Score?
Yes, refinancing will usually decrease your credit score. This is because you’re taking out a new loan, which requires a hard inquiry into your credit. The good news is that a single hard inquiry only results in a slight, temporary dip. Your credit score should recover in a few months to what it was before.
Is Credit Card Refinancing the Best Option For Me?
The choice to refinance is a personal one. Almost every type of refinancing option has some fees or risks, so you must evaluate those.
If you have a small amount of credit card debt, refinancing probably isn’t the best option. Instead, it’s better to create a payback plan and try to get rid of your balance as quickly as possible.
However, refinancing might be the better choice if:
- You have a large credit card balance
- You know the costs of refinancing will be less than what you save in interest
- You can trust yourself not to incur more debt when you have paid off your cards
Refinancing might be the very thing that will finally help you get out of credit card debt. Simply figure out the best refinance approach for your situation and get started on your debt-free journey.
You might also be interested in: The Ultimate Guide to Understanding Credit Card Interest Rates
