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Can You Refinance Credit Card Debt?

by Refi.me Staff on October 28 2021

Credit card refinancing is one of the most effective ways to lower your credit card debt. The other alternative is credit card consolidation. Credit card refinancing involves moving the balances from one or more credit cards to a single new card. For this to work, what’s important is that the new credit card must meet certain criteria. Let’s go over the ins and outs of credit card refinancing.

What Is Credit Card Refinancing? How Does It Work?

The first requirement is that the new card must offer a generous zero-interest balance transfer option. The second requirement is that it should have a high credit limit.

The good news is it’s easy to find credit cards that meet these requirements. Many card issuers offer balance transfer rates at 0% APR in order to attract new, long-term customers. However, the interest-free period is not open-ended. Every card issuer sets its own introductory zero-interest time limit. Once this grace period lapses, the interest rate jumps to the card’s regular interest rate. For most cards, the interest rate could be anywhere from 16% to 20%.

Ideally, you should look for a card that offers a 12-18 month interest-free grace period. This gives you sufficient time to pay off the earlier debts without incurring any interest.

Once you get approved for the zero-interest card, you transfer your debt from your high-interest cards to the new card. As the new card is a zero-interest card, you won’t pay any interest during the introductory period.

For credit card refinancing to work, the key is to finish paying off the card balance during the interest-free grace period. If you don’t, you’ll end up right back where you started. Once the grace period ends, you’ll pay the high interest of between 16% and 20% on the balance. This will make it even more difficult for you to get out of debt.

Another thing to watch out for is transfer fees. Some card issuers levy a transfer fee of about 1%-5% of the balance owed. You must factor this into your decision as it could add a significant amount to your overall debt.

It’s Not The Same As Credit Card Debt Consolidation

People often use the terms ‘credit card debt refinance’ and ‘credit card debt consolidation’ interchangeably but that’s not right. Although both serve the same purpose, they are in fact two completely different processes.

With credit card refinancing, you first apply for a zero-interest balance transfer credit card. You then transfer the balances from your old cards to the new card. The interest-free grace period allows you to pay off the balance without incurring any interest. This helps to lower your credit card debt.

With debt consolidation, you take out a personal loan from a bank. You then use these funds to pay off your credit card balances in full. Interest on personal loans is usually much lower than the interest on credit card balances, which helps reduce your credit card debt.

Pros And Cons Of Refinancing Credit Card Debt

Refinancing is the best way to manage credit card debt. However, it does have a few downsides that you should be aware of.

Pros

  • The ability to pay off your credit card debt without paying any interest on the balance
  • Refinancing with a credit card transfer is relatively easy if you meet the card issuer’s requirements

Cons

  • Most credit companies will require you to have a credit score above 680 to qualify
  • The transfer fee will add to your overall debt
  • If you don’t pay off the balance within the zero-interest period, you’ll end up paying a much higher interest rate

Is Refinancing Credit Card Debt The Right Solution For You?

Refinancing credit card debt is not the right solution for everyone. It may be right for you only if:

  • Your credit score is high enough to qualify for a zero-interest balance transfer credit card
  • You can get a credit card with a high enough balance to transfer all your high-interest debt
  • You will be able to pay off the entire balance during the interest-free introductory period, which is usually 12 to 18 months

When NOT To Refinance Credit Card Debt

Refinancing credit card debt is not the right solution for you if you don’t qualify for an interest-free balance transfer credit card. In this case, you should focus on building your credit score first. You’ll have a better chance of getting a low interest, high credit limit card with a higher credit score.

This is definitely not for you if you think you won’t be able to pay off your total balance during the introductory period. Interest rates typically skyrocket after the grace period ends. This will increase your credit card debt instead of lowering it. If you think you won’t be able to clear the debt during the grace period, consider credit card debt consolidation instead.

Important Things To Remember When Refinancing Credit Card Debt

#1- When you refinance credit card debt, you must focus on paying off this debt before the 0% interest rate period ends. Don’t be tempted to make new purchases just because your new card has a high credit limit. If you can’t afford to pay off the outstanding on time, you’ll end up racking up even more debt. This can be a tough cycle to get out of.

#2- With a good credit score, you may be able to negotiate a lower interest rate with most credit card issuers.

#3- It’s worth keeping in mind that although credit card refinancing works, it’s only a temporary solution.

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