Refinancing is one of the best ways to make credit card debt more manageable. Done the right way, it helps lower the overall cost of your debt. However, there are several factors that must be considered for this strategy to be successful. Rushing into refinancing credit card debt without doing your homework could potentially push you further into debt.
These are a few common mistakes to avoid when refinancing credit card debt.
To refinance credit card debt, you essentially transfer your debts from one or more of your current cards to a new card. For this to work, the new credit card must necessarily be a zero-interest balance transfer credit card. These are credit cards that offer new customers a 0% interest grace period. This is a promotional tactic used by credit card companies to attract new customers. You can make this work for you.
When you transfer your debt to a zero-interest card, it doesn’t attract any interest. The idea behind refinancing is that you pay off your outstanding debt within this grace period. Depending on your total debt, you could save hundreds of dollars in interest. If you transfer your debt to a credit card that doesn’t offer a zero-interest introductory period you won’t get this benefit. Instead, you’ll start paying interest on all the debt you transfer from day one. This defeats the purpose of refinancing.
When refinancing credit card debt, the aim is to pay off the debt within the grace period. That’s the only way to avoid interest and lower the cost of the debt. High-interest rates kick in after the zero-interest introductory term ends. You’ll end up paying a lot more on any debt that’s still outstanding after this interest-free period.
The zero-interest grace period varies from one credit card company to another. It’s generally in the region of 12 to 18 months but some may offer a shorter or longer period. If your total debt is very high, it’s crucial that you choose a credit card with a longer zero-interest grace period. This gives you sufficient time to pay it off completely.
Before choosing any card, calculate how much you’ll have to pay every month to clear your debt within the introductory period. Can you realistically afford to pay that amount every month? If not, look for a card with a longer 0% grace term.
The average balance transfer fee is about 3% to 5% of the total debt transferred. As with everything else, this fee also varies among credit card companies. This balance transfer fee can increase the total amount of your debt by that much. If this fee is too high, you may end up paying more than what you save in interest.
Before choosing a credit card, you must calculate two things. One is the balance transfer fee you’d pay on your total debt. The second is your potential savings in interest. The savings must be more than the transfer fee for refinancing to be worth it. If it isn’t, look for a card that has a lower balance transfer fee.
Credit card companies set a credit limit for every cardholder. Your credit limit will be based on your credit score. Every card issuer will calculate this differently, with some being more generous than others.
Your credit limit acts as a limiting factor in that you can only transfer debt up to your credit limit. If you have a large amount of debt, you’ll need to get a card with a high credit limit. If the credit limit is too low, you won’t be able to refinance all your debt.
Say that you’ve chosen a zero-interest balance transfer card. You’ve made sure it has a long enough grace period and a high enough credit limit for your needs. You’ve also calculated that the balance transfer fee is lower than your savings. So far, so good. You’re on the right track to lowering the cost of your credit card debt. Now all you need to do is make sure that you pay off the balance in full every month before the due date. This is crucial. If you keep missing payments or pay only the minimum, you’ll end up paying a higher interest rate than before. As a result, you’ll get pushed even deeper into a debt trap.
Once you refinance, you must stay committed to timely payments to paying off your debt completely before interest kicks in.
Without a solid debt repayment plan in place, you’re more likely to overspend on non-essential items. When the deadline comes around, you may not have enough funds to cover the full repayment amount.
A solid debt repayment plan will help you stay on track with your expenses and repayments. Your debt-repayment plan should take into consideration your income, essential expenses, and debt repayment. You should be able to cover all essential expenses and debt repayments with your monthly income. If you can’t, you may need to track everything you spend on each month for a couple of months. This will give you a better idea of what you’re spending your money on. Cutting back on non-essential items is one way to free up cash to put towards paying off your credit card debt.
Making minimum payments is what got you into trouble in the first place. Just because you’ve got a new credit card, doesn’t mean your earlier debt has gone away. It’s still there and you still need to pay for it. Making minimum payments may ease your financial stress temporarily. But it only keeps adding on the debt, making it even more difficult for you to get completely debt-free. Make it a rule to only charge your card for purchases that you can afford. That’s the only way you’ll be able to pay the bill in full before the due date and avoid the disastrous debt trap again.
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