Credit Card Refinancing

There's more than one way to refinance your credit card debt. Find out what your options are for lowering your interest rates.

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Credit card refinancing is an umbrella term for ways to pay off the debt on high-interest credit cards faster and with less interest.

If you’re concerned about high-interest credit card debt, you’re not alone. Three-quarters of the credit card holders in America don’t pay off their balance every month, with the average cardholder owing $5,315.

But you also don’t want to make your debt worse, or further damage your credit, and there are so many options, it can be confusing. There’s no one-solution-fits-all answer for people who need help to pay off credit card debt.

Let’s take a look at credit card refinancing options, so you can decide which one works for you, or whether an alternative, like debt management, would be a better fit.

What Is Credit Card Refinancing?

Credit card refinancing comes in a variety of forms, but they are all ways to lower the interest rate on the high-interest credit card debt you’ve accumulated.

Some of the most common credit card refinancing and debt consolidation methods are balance transfer cards, a personal loan, home equity loan and borrowing from a retirement account.

Which option is right depends a lot on credit score, credit history, debt load and the individual’s finances.

Credit Card Refinancing vs. Consolidation

Debt consolidation and credit card refinancing both reduce credit card debt. Choosing between credit card financing vs. credit card consolidation depends on your circumstances.

Debt consolidation involves getting a loan that has lower interest, and using it to pay off the cards. The loan can be secured, meaning you use an asset, like your house, as collateral or an unsecured personal loan, which has no collateral.

Credit card refinancing is transferring debt from a high-interest card to a new credit card that offers a zero-interest balance transfer option with a large credit limit.

Will Credit Card Refinancing Hurt Your Credit Score?

Credit card refinancing or debt consolidation can hurt your credit score in the short term, but will help in the long run, but only if you make on-time payments.

Applying for another credit card usually lowers your credit score by a few points. The average age of your credit cards is a factor, too. The higher the average, the higher your score, so, adding a new one lowers the average.

When you consolidate with a loan, lenders make a “hard inquiry,” on your credit report, which lowers your score by a few points. If you’re shopping around and there are several inquiries within a short period, generally 14-45 days, the credit bureaus treat it as one inquiry. Inquiries spread over more time, will have more of an impact.

Once you transfer the balance or pay it off with a loan, your score will begin to rise.

With a balance transfer, more available credit vs. credit used (known as credit utilization) adds points.

No matter the option, late payments and accumulating more debt will hurt your credit score.

How to Refinance Credit Card Debt

We’ve already mentioned that there are different ways to refinance your credit card debt.

Some, like a balance transfer card, are revolving credit, but at a lower interest rate. Others, particularly loans, also have lower interest and can be used to pay off the cards. You then make fixed payments for a specific amount of time to pay off the loan.

Each method has pros and cons. The best option is the one that works best with your financial situation and saves you money.

Refinance Credit Card Debt with a Personal Loan

A personal debt consolidation loan may be a good fit if your credit score is 670 or higher. A lower score means a higher interest rate on the loan and more fees. Personal loans are unsecured, which means you’re not putting up collateral. If you’re a member of a credit union, or have a relationship with a local bank, the process may be fairly simple. To keep the negative impact on credit low, borrow only what you need to pay off your debt on time each month.

The pros of a personal loan:

  • Combines several card payments into one uniform monthly payment.
  • Has an end date.
  • Doesn’t require as high a credit score as some other options.
  • Is unsecured, so you don’t need collateral.
  • Payments can come directly out of your paycheck.

The cons of using a personal loan:

  • The lower your credit score, the higher the interest rate and fees.
  • Prepayment and exit fees can make the loan cost more than expected.
  • If it’s used to pay off credit cards, and they’re still in use, it could increase debt.

Refinance Your Credit Card Debt with a Balance Transfer Card

Balance transfer cards offer a special rate of 0% for balance transfers from high-interest cards. Since you’re not paying interest, that means the entire payment goes toward reducing the balance. But the 0% interest rate is for a limited time (typically 12-18 months). Some also have fees, usually 3-5% of the amount transferred, so factor them in to see if it makes financial sense.

Balance transfer cards generally require a credit score of 680 or higher.

The pros of a balance transfer card:

  • 0% interest for balance transfers from higher-interest cards.
  • They are easy to apply for, many with quick online applications.

The cons of a balance transfer card:

  • 0% interest period is limited.
  • Fees may increase cost.
  • Higher credit score is needed to qualify.

Use a Home Equity Loan to Refinance Credit Card Debt

If you own a home, and have equity – meaning the home is worth more than what you owe on it – consider a home equity loan to consolidate debt. Home equity loans are a lump-sum loan, but are capped at 80% of the value of your equity. They are made through banks and online lenders, and it’s a thorough process that takes a close look at your finances, much like mortgage refinancing, and can include closing costs. A home equity line of credit (HELOC) is also based on home equity, but it’s a credit line you can draw on, rather than a lump sum.

A home equity loan can be a good alternative to other methods of debt consolidation if it works with your finances. Interest rates are very low if you have good credit – similar to home mortgage rates. But the lower your credit score, the higher the interest you will pay.

Pros of a home equity loan:

  • Low interest.
  • Lower monthly payments.
  • Fixed payments and a payoff date.
  • Depending on home equity, larger amounts available.

Cons of a home equity loan are:

  • Your most valuable asset, your home, is at risk of foreclosure if you miss payments.
  • Closing costs may make it more expensive than it’s worth.
  • If the housing market changes and your home value drops, you could end up owing more on your home than it’s worth.

Borrow from a Retirement Account to Refinance Credit Card Debt

Borrowing from your 401(k) to pay off credit card debt gives you an interest rate that’s usually a point or two above prime and doesn’t affect your credit without a lot of hoops to jump through. Still, it shouldn’t be your first option, because, in the long run, you’re giving yourself less retirement income.

Pros of borrowing from your 401(k):

  • It doesn’t affect your credit.
  • Interest is lower than most credit card rates.
  • Limit is 50% of account, up to $50,000.
  • Process is relatively hassle-free.

Cons of borrowing from your 401(k):

  • Not all employers allow borrowing from 401(k).
  • Interest is taxed twice, now and when money is withdrawn upon retirement.
  • It reduces the amount available for retirement by not building interest.
  • If you leave your job, you have to pay it back immediately, or pay penalties and taxes.

How to Choose the Best Credit Card Refinancing Loan

Long-term financial impact is the most important factor to consider when considering the best loan to refinance credit card debt. You don’t want the solution to put you in a worse position.

Make sure you understand your financial situation – how much of a monthly payment  you can afford and what you hope to accomplish. Don’t jump into something that may look good without researching it first. The Consumer Financial Protection Bureau and Federal Trade Commission both have tips on how to spot scams and lenders who will cost you too much money. If you have a relationship with a bank or credit union, that might be the best place to start.

Ease of applying is a great perk, but shouldn’t be the top qualification. The major things to keep in mind are:

  • A maximum monthly payment that can eliminate your debt.
  • Fees that aren’t so bad they make it more expensive than it’s worth.
  • A lower interest rate than what you’re currently paying.
  • Monthly payments you can afford.

Should You Refinance Your Credit Card Debt?

Refinancing your credit card debt may be just the ticket to strengthen your financial situation, or it may not be the best option for you. It all depends on your financial situation. If you’re on solid financial footing, but don’t want to keep throwing money at high interest rates, go for it.

But if you struggle to make monthly payments, and/or have a low credit score, so you can’t take advantage balance transfer cards and low-interest loans, it may be time to work on improving your credit.

It’s a good idea to refinance if:

  • You have a high credit score,
  • You can make monthly payments on time.
  • You can afford an option that doesn’t include fees and associated costs that make it cost more than it’s worth.

Refinancing may not be a good idea if:

  • You struggle to make monthly payments.
  • Aren’t confident you can pay a 0% balance transfer card off before the introductory period ends.
  • Your credit score is too low to get a good deal.

If refinancing isn’t a good option, there are alternatives to refinancing credit card debt, including debt management programs, debt settlement and credit counseling.

Debt Management Plan

A debt management plan with a nonprofit credit counseling agency consolidates debt with almost no negative impact on your credit and the potential for positive long-term impact. You won’t be taking out a loan or increasing debt, and your credit score isn’t a factor.  You make one affordable monthly payment to the agency, at a reduced interest rate to eliminate credit card debt. The agency distributes the money to your lenders at an agreed upon rate that pays off the debt in 3-5 years.  The plan is noted on your credit report while it’s in effect, but comes off once it’s completed. Closing credit card accounts may briefly lower a credit score, but timely payments will improve it. Debt management plans come with a monthly administrative fee of $30-$50.

Debt Settlement Programs

Debt settlement programs are usually through for-profit companies that negotiate with your creditors to resolve the debt for less than what you owe. You have to come up with the lump sum payment, which usually involves sending monthly payments an agreed-upon amount into an escrow fund. Reaching the appropriate “lump sum payment” usually takes 24-36 months  or more. An agreement with a debt settlement company usually also requires that you stop making monthly payments to creditors. In the time it takes to save the money, your credit score will go down because you’re not making monthly payments.

The Federal Trade Commission and Consumer Financial Protection Bureau urge those considering debt settlement to research options and keep an eye out for scams, including companies that “guarantee” to settle your debt and those that ask for up-front payments.

Working with a Credit Counselor

Working with an accredited credit counselor is a good way to explore debt-relief options and decide what works best for you. Nonprofit credit counseling agencies offer free credit counseling, and counselors will go over your budget with you, evaluate debt consolidation alternatives and suggest solutions. There are also for-profit agencies that charge a fee for counseling.

About The Author

Maureen Milliken

Maureen Milliken has been writing about finance, banking, investment, entrepreneurship, real estate and other related topics for more than 30 years. She started as the “Business Beat” columnist for the now-defunct Haverhill (Mass.) Gazette and currently is one of the hosts of the Mainebiz business-focused podcast, “The Day that Changed Everything” in addition to her daily writing. She also is is the author of three mystery novels and two nonfiction books.

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