What Is Credit Card Refinancing?

High-interest credit card debt can be a drag on your budget. Making matters worse, your balance can grow quickly due to compound interest — which is interest assessed on unpaid interest. In spite of this, inflation and increased costs of living have led more people to rely on credit cards to bridge the gap between income and expenses.

But you may be able to trade high-interest credit card debt for a lower-rate loan, which could lower your monthly payment or help you pay down debt quicker.

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How does credit card refinancing work?

Credit card refinancing is the process of trading high-interest debt for lower-interest debt, which can free up income to pay for everyday expenses and help save you money over time. This strategy is best if you’ve maintained a good credit score, and works well when paired with improved money habits.

You can use a personal loan, 0% APR balance transfer credit card, or home equity loan to refinance a single credit card balance or to consolidate multiple debts into a single loan and payment. If you qualify for a lower interest rate through any option, you could reduce your monthly payment, decrease the amount of interest you owe, and/or pay down your debt faster.

According to data from the Federal Reserve, credit card APRs have been generally on the rise since 2018. Since credit card rates are variable, you could expect your rate to increase if the trend continues. Personal loans and some home equity loans, however, have fixed interest rates which will not increase even if current rates do.

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Debt consolidation vs. credit card refinancing

Credit card refinancing and debt consolidation are fairly similar: refinancing typically refers to paying off a single debt with a new loan, while consolidation refers to paying off multiple debts with a new loan. Either may be able to reduce your rate, repayment time, and/or total amount of interest paid.

Read More: Debt Consolidation Loan vs. Credit Card Refinancing

Refinancing with a personal loan

Personal loans typically have a fixed annual percentage rate (APR), which means your monthly payments won’t change over the life of the loan, making them a good choice for refinancing high-interest variable-rate credit card debt.

Personal loans are usually unsecured and often have lower APRs than credit cards. Repayment terms typically range from one to seven years, depending on the lender, and loan amounts can range from under $1,000 to more than $100,000, depending on the lender, loan purpose, your credit profile, and income. You typically need good to excellent credit to qualify for a personal loan, especially if you’re aiming for a low rate, but there are some lenders who specialize in bad-credit personal loans.

Learn More: Annual Percentage Rate (APR) vs Interest Rate

Prequalify to compare loans

The quickest way to get a sense of what you can save with a personal loan is to prequalify with multiple lenders. Prequalification does not impact your credit score, nor is it an offer of credit. It can help you compare the APRs, amounts, and loan terms you may be eligible for from different lenders.

You can prequalify with most lenders on their websites, or you can use a personal loan marketplace to prequalify with multiple lenders at once. Note that once you formally apply, the lender will perform a hard credit check that could hurt your score temporarily.

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How much you might save

To demonstrate how this works, let’s compare the cost of making credit card payments versus refinancing with a personal loan.

Let’s say you have a credit card balance of $8,000 at a 27.99% APR. You have a good credit score and qualify for a personal loan with a 16.61% APR and a repayment term of three years, as well as a five-year personal loan with an APR of 21.79%. Using a personal loan calculator, here are some examples of how much you could save by using a personal loan to pay off your credit card debt.

No matter which term you look at, a personal loan has advantages. With the three-year repayment term, you could save nearly $5,500 in interest and pay off the debt two and half years sooner. With the five-year repayment term, you could reduce your monthly payment slightly and still save more than $2,400 in interest.

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Using a 0% balance transfer card

Transferring balances between credit cards is simple, but usually makes the most sense if you have a low or 0% APR balance transfer offer. A balance transfer offer could be on an existing card or a new card that you seek out for such a promotion. You can transfer one or more credit card balances to the chosen card, up to its credit limit.

The 0% APR period could last from 6 months to two years, depending on the card issuer and relevant promotion. This is important, because the length of the promotional APR period indicates the time by which you should pay off the transferred amount. Otherwise, the rate will adjust to the card’s standard APR, which could be near or higher than 30%. In addition to paying off your balance within this time, you’ll also need to pay a balance transfer fee, which is usually 3% or 5% of the transferred amount.

Note that, unlike a personal loan, credit cards have a variable rate, which means the APR may fluctuate as market conditions change. If you keep a balance once the rate adjusts, your minimum monthly payment and the amount of interest charged could increase.

Here’s an example of how a balance transfer credit card works:

Let’s say you’ve been juggling the payments for these two credit cards:

1. $3,000 balance, 24.99% APR and a minimum payment of $92
2. $4,000 balance, 24.99% APR and a minimum payment of $123

You found a balance transfer credit card with an offer of 0% for 18 months and a balance transfer fee of 3%. You can afford a monthly payment of $400.

Related: Personal Loan vs. 0% APR Credit Card

The balance transfer fee may be substantial, but it’s far less than the interest you’d otherwise pay. Plus, in this example, you’d pay off the debt 4 months sooner, with $1,600 saved. The caveat is that it’s crucial to pay off all or the bulk of what you transfer before the 0% APR expires, especially if the card’s standard rate is high.

Learn More: Debt Consolidation Loan vs. Balance Transfer

Pros and cons of credit card refinancing

Pros

• Less money toward interest: A lower APR means a larger portion of your monthly payment can go toward the principal balance.
• Faster payoff: As you pay more toward the principal it takes less time to pay off your debt.
• Fixed interest rate: With a credit card, your rate may change based on market conditions. With a personal loan or home equity loan, your interest rate stays the same.
• Potential for rate discounts: Some personal loan and home equity lenders offer a small rate discount (about 0.25 percentage points) for setting up automatic payments. This would mean you could pay even less toward interest while helping ensure timely payments. Some lenders also offer a similar discount for allowing direct payment to your creditors, in the case of debt consolidation.

Learn More: Debt Consolidation Loan Rates

Cons

• Possibility of a higher monthly payment: You may pay off debt faster, but that could also mean a larger monthly payment than the minimum on your credit card. Make sure any new payment is sustainable for your budget.
• Origination fees or balance transfer fees: A personal loan or home equity loan often carries an origination fee, which could total up to 12%. Balance transfer cards typically have a fee of 3% to 5% of the total balance.
• May not address underlying financial issues: Freeing up available balances on your credit card could lead to more problems if there is an underlying income, budgeting, or spending issue that is going unaddressed. A 2022 TransUnion report found that, on average, credit card balances after consolidating debt returned to previous levels after just 18 months.
   

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Credit card refinancing alternatives

Balance transfer credit cards and personal loans aren’t the only options for refinancing credit card debt. These alternatives could also aid in refinancing:

• Home equity-based financing: A home equity loan is a type of installment loan that uses your home’s equity as collateral to secure the loan. A secured loan carries less risk for lenders, so rates tend to be lower than on personal loans. However, you’ll need to have sufficient equity in your home — lenders often limit the combined total of all loans on a property to 80% of its value. And, since the loan is secured by your home, you could lose it if you can’t make payments.
• Credit counseling: If you’ve identified holes in your approach to money management that are contributing to credit card debt — or if you don’t have a money management plan or budget in place — a nonprofit credit counseling agency could help you get a handle on your finances and develop a debt repayment plan. The National Foundation for Credit Counseling offers free and low-cost services to address multiple aspects of managing credit card debt.

Credit card refinancing FAQ

When should I refinance my credit card?

If you’re planning to refinance your credit card debt, it’s best to do so before your balances become unmanageable or your credit takes a hit from missing or late payments. You can often prequalify for both personal loans and credit cards to see whether you might be eligible, without a hit to your credit score.

How do I qualify for credit card refinancing?

To qualify for credit card refinancing, you’ll need to meet the credit standards of your preferred lender. Most lenders require a fair to excellent credit score for personal loans, with the best rates reserved for those with higher scores, while most credit card companies require good to excellent credit for a new 0% APR balance transfer card. But if your credit has suffered, review your existing credit cards for low or 0% APR transfer offers.

Can I refinance my credit card debt with bad credit?

It’s difficult to refinance or consolidate debt with bad credit, but not impossible. Lenders use your credit score plus your income and other factors to gauge how likely you are to repay them. A low credit score acts as a red flag to lenders that you may not repay them in full. As such, lenders who do approve you will typically assign a higher rate, which minimizes potential savings from refinancing.

Where can I refinance or consolidate my credit card?

You can refinance or consolidate credit card debt with many banks, credit unions, and online lenders. We’ve compiled a list of the best debt consolidation loans to help you decide.

Related Articles:

• How Much Credit Card Debt Is Too Much?
• How To Negotiate Credit Card Debt
• How To Handle Credit Card Debt When Unemployed
• How To Pay Off $10K in Credit Card Debt
• How to Pay Off $30k in Credit Card Debt
• Ways To Consolidate Credit Card Debt