What is credit card refinancing?

Opened brown leather wallet with credit cards, closeup
Africa Studio / Shutterstock

Is that mountain of credit card debt starting to seem insurmountable? Those missed payments and high interest rates can really stack up — but that’s where balance transfer credit cards come in.

Credit card refinancing is simply moving your balance from one card to another so you can take advantage of lower interest rates.

Ideally the new card would come with a 0% interest rate for a promotional period. Often, these introductory rates last between 12 and 21 months, giving you time to pay down your debt, before switching back to a higher rate.

According to LendingTree, the average APR for balance transfer cards following the introductory period was 18.17% for April 2021.

Just bear in mind that, depending on your credit score or amount of debt, you may not be able to take advantage of the best balance transfer credit cards.

Pros

  • 0% interest: If you meet the criteria, shop around for a card that will completely free you from interest while you wrestle with your debt.

  • Better permanent rates: Even if you can’t take advantage of 0% interest, you might still find a balance transfer card with a lower, lasting rate. You'll still be fighting uphill, but it won't be as steep.

  • Quick and convenient: The application process for credit card refinancing can be much faster than getting a personal loan. You’ll likely get a decision within minutes.

Cons

  • The 0% interest ends: Nothing lasts forever, including that wonderful introductory rate. Before you refinance, find out whether the regular rate is actually higher than what you’re currently paying.

  • Variable rates: A balance transfer credit card is still a credit card, meaning it could have a variable rate. Your 13.99% APR could jump to 23.99% in the future.

  • Transfer fees: While it's exciting to transfer your balance to a new card, you might miss the transfer fee that comes with it. The fee is generally 3% to 5% of the balance you're transferring.

  • Limitations: Depending on your credit score or debt, you may not be able to take advantage of the best balance transfer credit cards. A poor credit score may limit you from a 0% APR card, while the new card's credit limit may not be high enough if you’ve accrued a lot of debt.

What is debt consolidation?

Very Upset Woman Holding Her Many Credit Cards.
Andy Dean Photography / Shutterstock

If you’re juggling debt on multiple credit cards, you might want to consider a consolidation loan. You can roll several credit card balances into one lower-interest loan, which means you only have to worry about one payment and interest rate instead of coordinating multiple payments every month.

A personal loan is generally paid out in a lump sum from the lender with a fixed rate and term. That means the interest rate won’t change for the duration of the loan, and you will have the same monthly payment until the loan is fully repaid.

Lenders are less likely to approve unsecured loans if you don’t have a decent credit score. There are [options for borrowers with a lower credit score](https://moneywise.com/borrowing/personal-loans/bad-credit-heres-how-you-can-still-get-a-personal-loan, but they might involve higher interest rates and monthly payments.

You can get matched with a debt consolidation loan through Credible, a service that works with many lenders at once. Based on your credit score, you could get matched with a loan of up to $100,000, with a fixed interest rate between 2.49% and 35.99% interest.

Pros

  • Set plan: Because personal loans carry a fixed term, you're forced to commit to a plan to fully pay off your debt, typically in two to five years.

  • One bill: Consolidating your debts means you only have one monthly payment to worry about.

  • Lower interest rates: You will likely get a better rate on a personal loan than you would on a credit card, saving you money in interest. It’s also normally a fixed rate, so it will never go up.

  • Low fees: While some lenders offer no-fee debt consolidation, others have minimal costs, like a one-time "origination" fee of up to 5%.

Cons

  • Credit score: Lenders are unlikely to approve unsecured loans unless you have a decent credit score, which may disqualify many people from taking advantage. There are options for borrowers with bad credit, but they will likely involve higher interest rates and monthly payments.

  • Application process: Personal loans require a more involved application. Lenders will want not just your credit score but also documentation about income, debts and financial assets.

  • No lower payments: Your fixed monthly repayment will never decrease, even as you pay down a majority of the balance.

How to choose the right option

Couple sitting on sofa and doing online shopping on digital tablet
wavebreakmedia / Shutterstock

Deciding between these two options depends on your current situation and future goals.

If you’re just looking to lower the interest rate on your credit card, refinancing is likely the best option — even if you don’t qualify for a zero interest introductory period on a balance transfer card, you can still try to switch to a card with a lower APR to save money.

If you’re looking to pay off your credit card debt completely — and can’t imagine doing so during the grace period of a balance transfer credit card — then a debt consolidation loan is probably a better option. With a fixed term, you can create a plan to pay off your entire debt within five years.

Both options offer the possibility of lower interest. But as you weigh your options, don't forget to crunch all of the numbers and ensure things like fees and interest don’t stand in the way of debt freedom.

Other ways to free up money to help pay debt

  • Invest your spare change: Making money in the stock market doesn’t always mean you’ve got to spend a lot of money. Apps like Acorn let you grow a diversified portfolio with just dollars a month. You can even earn $10 just by signing up and making your first investment.

  • Refinance your mortgage: Mortgage rates remain historically low, so refinancing into a lower rate could save homeowners hundreds of dollars a month and thousands over the life of their loan.

  • Slash your insurance rates: Review your policy rates and check out whether you can save by shopping for a lower rate on your auto insurance or home insurance online.

  • Sell your old stuff online: Got any old toys or tech collecting dust in the back of your closet? Clear out the clutter and make some extra cash by selling your old things online for free. You won’t even need to pay for shipping.

About the Author

Serah Louis

Serah Louis

Staff Writer

Serah Louis is a staff writer with MoneyWise. She loves storytelling and research and was published in Ricepaper Magazine's 2019 anthology, Immersion: An Asian Anthology of Love, Fantasy, and Speculative Fiction.

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