Credit cards have their perks — they let you build your credit and make convenient and secure purchases. However, they can also leave you in debt.
Borrowers dig themselves into a hole when they use multiple cards and can’t pay off their balances, and the high interest rates that may come with credit cards may make that hole deeper.
Luckily, all hope isn’t lost — you can dig yourself out by refinancing your credit card debt. Grab your shovel and check out this quick guide to identify a solution. We go over the perks of consolidation and five ways you can refinance credit card debt to discover financial freedom.
What is credit card refinancing?
Credit card refinancing is a type of debt consolidation. The process involves combining multiple credit card balances into one monthly payment.
Why People Choose to Consolidate Loans
You should realize that credit card refinancing is not a “get out of jail free card” — it’s still a debt that you’ll have to pay off. So, why do people bother?
In short, consolidation helps you get a grasp on your debt. Payments become much more convenient as you’ll only have to pay one creditor rather than several. Additionally, you can save money by accessing lower interest rates. You may also be eligible for a shorter payoff period that will help you get out of debt faster.
How to Refinance Credit Card Debt — 5 Options
Refinancing might seem like it’ll be your saving grace. However, before you jump in, you should realize that there are several ways to go about consolidation.
Not all methods will be right for you. Some have strict eligibility criteria, while others don’t offer interest rates that are low enough to save you money.
Choosing how to refinance your credit card debt is not a decision to make lightly. Consider your financial situation, and check out these five common ways to refinance credit card debt to determine which is the right move.
1. Balance Transfer Card
When borrowers want to get out of credit card debt, they often turn to balance transfer cards. This method is tempting as providers offer a 0% introductory APR period.
Before pursuing this route, know that you’ll need a good to excellent credit score to qualify. If you have a score lower than 690 on the FICO scale, most providers won’t accept your application.
Another downside to balance transfer cards is that the 0% introductory APR period usually only lasts for 12-18 months. After this promotional period, you’ll have to pay regular interest rates.
However, balance transfer cards can be a smart option for some borrowers. We recommend taking advantage of the interest-free payments if you can pay off your balance in a year or so. If you have a high enough score, you may want to consider this refinancing option.
2. Credit Card Consolidation Loan
Credit card consolidation loans are another excellent refinancing option. You’ll get access to fixed interest rates, meaning you can expect to make the same payments every month.
To get the lowest APR possible, you will need a good to excellent score. Good-credit borrowers tend to go through banks as they offer competitive APRs and perks for existing customers (larger loan amounts, discounts, etc.).
If you have a fair or bad score, your bank may not approve you for a loan. You may need to go through an online lender. Look for providers that will let you pre-qualify without harming your score.
Poor-credit borrowers may also ask a credit union for a loan. These federal institutions cannot charge an APR of more than 18%, meaning you can get decent rates even if your score is less than ideal.
3. Home Equity Loan
A home equity loan involves borrowing back money that you’ve already paid on your mortgage. After getting the funds you need to pay back your debt, you’ll make regular payments with interest.
With a home equity loan, you can expect lower payments than you would get with a personal loan. The reason? The repayment period is more extended, and your home acts as collateral.
Think a home equity loan is right for you? Contact Associates Home Loan today! Our loan officers work to get you the best rates possible (even if you have less than excellent credit).
4. Debt Management Plan
Nonprofit credit counseling agencies offer debt management plans to help you consolidate. They roll your debts into one fixed monthly payment, and in some cases, they can reduce your interest rates by up to 50%.
Debt management plans are advantageous because they can help you save money and don’t affect your credit score. However, they often come with startup costs and monthly fees. Plus, they can take a long time to repay (3-5 years, on average).
If you are interested in a debt management plan, be sure to do the math. By comparing the cost of this type of plan with other refinancing options, you’ll be able to choose the most affordable path.
5. 401(k) Loan
Dipping into your 401(k) should be a last resort. Only turn to this method when you’ve determined that other options aren’t ideal for your financial situation.
Why should you use 401(k) loans sparingly? For one, it reduces the amount of money you have for your retirement. It also comes with heavy fees if you default. And, even though most borrowers must repay within five years, you will have to come up with the money sooner if you lose or quit your job.
However, if you take out a 401(k) loan, you’ll enjoy significantly lower interest rates, in addition to it having less impact on your credit score.
Refinance Credit Card Debt to Regain Control of Your Finances
When you’re sitting under a mountain of credit card debt, things can seem pretty bleak. But, through consolidation options like those we’ve discussed, you can regain control of your finances.
If you need additional advice, don’t hesitate to contact Associates Home Loan. Our experts can help you qualify for home equity loans or walk you through other types of borrowing to refinance credit card debt.