How to Refinance Credit Card Debt

Refinance Credit Card Debt
Key Takeaways:
  • Refinancing credit card debt can lower the cost of your debt and simplify your payments.
  • You can refinance your credit card debt by transferring your balances to another credit card or by paying them off with a loan.
  • Refinancing credit card debt works best as part of a broader budgeting program to reduce debt.

Credit card refinancing can make your credit card debt easier to manage in two major ways:

  • You might be able to lower the cost of your credit card debt by lowering the interest rate you pay on it.

  • Refinancing can reduce the number of monthly payments you need to make. 

This article will explore different ways to pursue credit card refinancing, and its potential benefits.

What Is Credit Card Refinancing?

Refinancing means replacing one form of debt with another. What you accomplish by doing this depends on the type and terms of the debt involved. Credit card refinancing can help you lower your interest charges and/or simplify your monthly payments.

Credit card balance transfer

As the name suggests, this involves transferring the balance you owe from one, or more, credit cards to another credit card. A balance transfer is especially effective if you can lower your interest rate in the process. A balance transfer can also be a way to move balances from multiple credit cards onto a single card. That means you only have to deal with one monthly payment, instead of a separate payment for each card.

Credit card balance transfer vs. debt consolidation loan

Instead of transferring credit card balances to another credit card, you could instead take out a loan to pay those balances off. Doing this may have a few advantages:

  • Loans often have lower interest rates than credit cards.

  • Consolidating multiple credit card debts into a single monthly loan payment may make your debt easier to manage.

  • Loans generally have a defined repayment schedule, while credit cards don’t. This schedule can give you a clear timetable for paying off the debt.

How does debt refinancing/consolidation work?

Debt refinancing and consolidation are related, but they mean two different things:

  • Refinancing simply means replacing one debt with another. There are different ways you can approach this, and different things you can accomplish by doing it. Often, the goal is to lower the interest rate.

  • Debt consolidation means combining multiple debts into one. A primary goal of this strategy is to simplify monthly payments.  

You can refinance one debt by replacing it with another debt. Or you can refinance multiple debts. If you replace those debts with a single debt, you’ve both refinanced and consolidated the debt.

The benefits of refinancing depend on the type and terms of both the original debt and the new debt. 

Ideally, refinancing should involve lowering your interest rates. If you’re consolidating multiple debts, you could also make your payments easier to manage. When you refinance from credit card debt into a loan, another benefit may be putting you on a set schedule for paying off the debt. 

3 Ways to Refinance Credit Card Debt

When you refinance credit card debt, you have various options for what you replace the credit card debt with, as described below.

Credit card balance transfer

You can transfer a credit card balance from one card to another. This makes the most sense when the new card has a lower interest rate than the old card. You can also use a balance transfer to consolidate multiple credit card balances into one balance. This means you would only have one monthly payment to worry about. 

There are balance transfer credit cards that are designed specifically for this purpose. Often, they charge little or no interest for a limited time after the balance transfer takes place. That gives you some time to pay down your debt without being charged interest.

As useful as balance transfer cards can be, there are some things to watch out for. For example, there is often a one-time fee for any balance you transfer to the new card. This may be charged as a percentage of the amount transferred. 

Another thing to be aware of is what happens after the initial balance transfer period ends. At that point, the remaining balance will be charged interest. The ongoing interest rate may be higher than the rate on your previous credit card. 

The way to maximize the savings on a balance transfer card is to pay off the balance before the low-interest period expires. In any case, before signing up, you should figure out whether the money you’ll save during that low-interest period will exceed the costs involved. Those costs may include balance transfer fees and the excess interest after the low-interest period expires. 

Personal loan

Unlike a mortgage or an auto loan, a personal loan is not limited to a specific purchase. So personal loans can be used for a variety of things, including credit card debt refinancing and consolidation.

According to Federal Reserve data, personal loan rates are generally lower than the rates charged on credit cards. That can make them an excellent tool for refinancing credit card debt. 

The interest rate you can get on a personal loan will depend on your credit history. The amount of other debt you have is also important. Another thing that affects your ability to get a loan and the interest rate you qualify for is whether you can offer collateral. 

If you’re refinancing as part of an overall program to pay down debt, a loan might be better than keeping the balance on a credit card. Credit cards generally allow for low minimum payments, which can prolong the repayment. And, of course, credit cards allow you to add to your debt at any time, which keep some people trapped in a debt cycle.

Home equity loan or HELOC

Another form of loan that can be used to refinance a credit card is a home equity loan or a home equity line of credit (HELOC). Both use equity in your home as collateral to secure your debt. 

A home equity loan involves borrowing a specific amount all at once, and then repaying it over a set schedule. A HELOC works more like a credit card. You can draw money at different times, as you need it, up to your limit (and usually within a predefined time period). 

Using your home as collateral is likely to earn you a lower interest rate than you’d get on a credit card or personal loan. However, you do give up a key benefit, which is that credit card debt is unsecured. If you can’t pay your debt, your account may go to collections but you won’t lose your home. If you pay off your credit cards with your home and then struggle financially in the future, you might risk losing the home. For this reason, many financial advisors recommend that you don’t use a mortgage or home equity loan to pay off unsecured debt.  

Is it a Good Idea to Refinance Your Credit Card Debt?

Refinancing your credit card debt can be a very good idea under the right conditions. Ideally, refinancing your debt should lower your interest rate and/or give your debt more of a structure that keeps repayment on track. 

However, refinancing credit card debt could free up your credit limits for even more credit card spending. This is a common pitfall, and it just makes the problem worse. 

So if you refinance your credit card debt, it’s best to do it as part of a broader debt reduction plan. That should include budgeting so you can make your payments and not depend on additional borrowing. 

Two Alternatives to Refinancing Your Credit Card Debt

Refinancing your credit card may not be the right approach for everyone. You might need to consider alternative approaches if any of the following apply to you:

  • You’re not comfortable choosing the right loan or credit card for refinancing your debt. 

  • Your credit history is not good enough to qualify you for new credit.

  • You wouldn’t be able to afford the monthly payment, even if you refinanced your debt.

If any of the above describe your situation, below are two alternatives you might consider.

Debt management plan

A debt management plan involves working with an accredited credit counselor who will help you enter into voluntary agreements with your creditors. The counselor won’t lend you money to refinance your credit card balances but will help you list all of your debts and make a budget. You will have to agree not to use credit while you are enrolled in the plan.

The counselor will contact creditors on your behalf to negotiate better terms, like waived fees or a lower interest rate. These negotiations usually don’t reduce the amount you owe. Once you enroll in the plan and your creditors approve it, you’ll make a single payment to the credit counseling agency, and the agency will forward a portion of it to each of your creditors.

Debt settlement

Debt settlement, or debt relief, is a process where you negotiate with your creditor or debt collector to pay less than the full amount you owe. You can do this yourself or you can hire a reputable company like Freedom Debt Relief to help you.

Frequently Asked Questions

Can debt refinancing hurt your credit score?

As long as you keep making your payments on time, refinancing your debt doesn’t typically hurt your credit. Your credit score may drop by a few points when you apply for the balance transfer card or consolidation loan. But if you pay off credit cards with an installment loan your credit score will probably go up because your credit utilization rate will go down.

How does debt refinancing compare to a debt snowball?

If done correctly, refinancing could be a more financially efficient way of dealing with debt than the snowball method. Refinancing can reduce your interest expense, while the snowball method — which involves paying off the smallest of your loans as quickly as possible and then moving on to the next smallest loan, and so on —  is not designed with that in mind. Also, refinancing can simplify your debts more quickly than can the snowball method. You can consolidate your debts all at once by refinancing, instead of just reducing them one by one with a snowball approach. 

When is a good time to refinance credit card debt?

Any time you’re having trouble managing your debt payments is a good time to consider refinancing. However, two ideal times to refinance are: 1) when interest rates have fallen; or 2) when your credit score has improved significantly. Those are times when you’ll have the greatest chance of lowering the interest expense on your debt by refinancing.