A credit card is an important financial tool that provides an emergency source of funds. It also offers an opportunity for earning rewards for travel or cash back. This tool can help with credit building which will allow you to get better loan offers on your mortgage or auto loans. Sadly, life happens and you can sometimes find that you are stuck with different credit card debt balances. Though having an effective strategy to pay off these debts can be difficult, it is quite possible.
With different strategies available to follow, one of the best ways to go about paying off the debts is to refinance them. Credit card refinancing involves transferring the debt balances of your credit cards to a new card with better interest rates and terms. Refinancing is a common term for the different ways you can pay off expensive debts easier and with better rates.
If you have multiple high-interest credit card debts and you’re looking for an easier way to pay them off, then you will find refinancing a great option. Let’s look at the different options you can go for and the benefits and downsides of each of them. But first, let’s answer an important question that you might be asking – will refinancing affect my credit score?
Will Refinancing Affect Your Credit Score?
Yes, credit card refinancing may negatively affect your credit score but only in the interim. This will however change over time as there will be an improvement in the long run. Applying for a new card for the purpose of refinancing is known to reduce your score by some points. Your card’s average age is taken note of. The higher the average age, the higher your score. Taking a new debt, therefore, reduces the average.
However, once you transfer the old debts to the new ones and start making payments, your score will start increasing. In time, your points will also increase.
How to Refinance Credit Card Debt
So, what are the different ways you can refinance your debt? Here are the different ways to do this:
Personal Loan
Personal debt consolidation loans are a good source of income for this. They are mostly a good fit if your score is around 670 and higher. Having a lower score will affect the loan offer you will get. Many lenders carry out a check on your credit report before lending you money. If you have a poor score, they will give you a loan offer with a high-interest rate.
Personal debt consolidation loans are unsecured. This means that you will not need to present any collateral for them. You can get them at a credit union, a financial institution, and online lenders.
The following are the benefits of a personal loan:
- You can combine different card balances into one single payment.
- It comes with an end date.
- It doesn’t require that you have a high credit score but it is important if you want a loan with better interest rates and terms.
- It is unsecured so you wouldn’t need collateral for it.
- You can pay directly from your paychecks.
The following are some of the downsides of personal loans:
- There might be penalties for paying off the debt early. These can be more expensive than the loan itself.
- If you use it to pay off your credit balance and you keep using it, it will increase your debt.
Home Equity Loans
If you have a property, you can ask your mortgage firm to determine the equity of your home. Equity refers to the difference between the monetary value of your home and your mortgage debt. You can decide to take out this equity as a loan and use it to refinance your debt.
Home equity loans are huge sums of money paid to you. Interest rates on them are very low especially if you have a good credit score.
The following are some of the benefits of this:
- It comes with a lower interest than other methods.
- It allows you to make low monthly payments.
- It comes with a fixed payoff date and monthly payment.
- If you have high home equity, you can borrow a lot of money.
The following are some of the disadvantages of home equity loans:
- You put your valued asset, your property, at risk of foreclosure if you miss monthly payments.
- Depending on the mortgage lender, closing costs might be expensive.
- If the real estate market changes and your property’s equity drops, you will end up owing more mortgage debt than before.
A Balance Transfer Card
This card offers an interest rate of 0% for the transfer of balances from expensive interest-rate credit cards. Since it is interest-free, you will make monthly payments without paying any interest. This means that you will repay your balance without issues. The interest rates’ free offer for this card lasts for 1 to 2 years. You might also be asked to pay some fees by lenders when carrying out refinancing av kredittkort (of credit cards) with this method.
The following are some of the benefits of this method:
- It has 0% interest rates for transfer of balances on high-interest cards.
- They are easy to get with many lenders offering swift online applications.
- You can repay or reduce the debt balance faster since you won’t be paying interest.
The following are some of the cons of this:
- The interest-free rate is limited for a period.
- The fees you pay to get this card might be expensive.
- You need to have a high score of above 670 to qualify for it.
A Retirement Account
Another way you can refinance is to borrow from your retirement account. Doing so gives you enough money to pay off your card balance debt with a better interest rate. This method doesn’t affect your credit score at all, however, it should be your last option because you are reducing your retirement funds for the future.
The following are some of the pros of borrowing from your retirement account:
- Your score is hardly affected.
- The interest rates are lower than some of the methods
- The borrowing limit is 50%
- The process for this is stress-free and easy.
The following are some of the downsides of this:
- Borrowing from an IRA is not open to every employee.
- You will pay taxes on interest twice. The first is when you borrow from the account and the next is when you withdraw from the IRA after retirement.
- You might end up with lower retirement funds.
- If you get sacked or leave your current employment, you will have to pay back the money you borrowed or you will pay fines and taxes
Factors to Consider When Choosing a Credit Card Refinancing Option
Now that you know the different ways to refinance this debt, what factors can help you choose the right option? Here are a few factors to consider:
Understand Your Financial Situation
Would you be able to afford the monthly payment on the new debt? Do not jump to choose any method without understanding how it works. If a personal loan fits your repayment capacity better, go for it. If not, look for another option that you can afford.
Long-term Financial Impact
This is another factor to consider. You wouldn’t want to go for a method that will have a serious negative affect on you financially. For instance, if you take a home equity loan and your property value falls, you will end up racking up more debts.
The Lender
Your current lender might offer refinancing options but if it doesn’t, you will have to pick a new one. You need to research online for good lenders with the best card refinancing options. The federal trade commission and other regulatory organizations have tips that can help you avoid scams and bad lenders. Make sure you check this information.
Application Process
This is another factor to keep in mind. How fast will the new loan be approved and the balance transferred? Consider the reputation of the lender and what others say about its services.
Conclusion
Credit card refinancing is a good option for you to improve your financial status. With it, you can take a new debt with better interest and terms you can afford. If you are planning on this, keep the above-mentioned options and factors in mind.
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