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What is Credit Card Refinancing and How Does it Work?

Key Takeaways:

  • When you refinance a loan, you replace it with another loan, usually one with a lower interest rate.
  • Credit card refinancing is the process of transferring debt on a credit card to another credit card, usually one with a lower interest rate and better terms.
  • While credit card refinancing may alleviate your debt burden, it doesn’t relieve you of your debt obligations. You still have the same amount of debt. You just have a lower interest rate and better terms.
  • You can refinance or consolidate credit card debt by using a balance transfer card, taking out a personal loan, or opening a home equity line of credit.

Credit card refinancing allows you to transfer debt from an old credit card to a new credit card with a better pricing structure and more favorable terms.

What is Credit Card Refinancing? 

Credit card refinancing is a way of reducing the interest rate on your credit card debt by transferring the balance to a new credit card with a lower interest rate.

When you refinance, you borrow new money to pay off old money.

Credit card refinancing is a simple way to lower your interest payments. You can move balances from various cards to a single card or personal loan with a more favorable pricing structure.

As with everything in the world of loans and credit, your credit score plays a huge role in credit card refinancing.

Your credit score will determine the rate you get when you are looking to refinance your credit card debt. 

Since the goal of refinancing is to get lower rates and better terms, ensure the rate and terms you are given during refinancing are lower and better than what you are currently paying.

How Credit Card Refinancing Works 

When you refinance a credit card, you replace one card – with a high interest rate with another card – with a lower interest rate. 

Moving your balances to a credit card with a 0% APR can save you a lot.

If you used a personal loan to refinance your credit card, you will get fixed rates and a specific date to pay off your debt. 

If you are refinancing your old credit card with a new credit card, look for a card that charges a zero percent APR on balances you transfer for a set period of time.

If you don’t qualify for a zero APR card, consider moving your balances to one of your cards with the least interest. 

Ensure the new loan has a lower interest rate and better terms than the old loan. 

Although some lenders will extend loans to borrowers with bad credit scores, you will need to have good to excellent credit if you want to get the best rates for a personal loan.

Try not to incur additional charges on your new card or you could be piling up even more debt.  

Credit Card Refinancing versus Debt Consolidation 

Credit card refinancing is a way of moving your credit card balances to a new card with a favorable pricing structure while debt consolidation is the act of combining several loans into a single loan.

The table below highlights the differences between card refinancing and debt consolidation. 

Credit Card RefinancingDebt Consolidation
A way of reducing the interest rates on your credit cards is by moving balances to a single card with lower interest rates and better terms. Taking a loan to clear your credit card balances; Combining several loans to a single loan with one monthly payment.
A good way to lower your monthly interest payments. A good way to alleviate your debt burden. 
Lower interest rate Lower interest rate, fixed interest rate, fixed monthly payment, and definite payoff term
Credit Card Refinancing versus Debt Consolidation 

Credit card refinancing and debt consolidation serves the purpose: reducing interest rate and alleviating debt burden. However, they should be used in different contexts. 

When to RefinanceWhen to Consolidate
If you can pay off your debts in 12 – 18 months and you are using a card with an introductory rate of zero percent APR to refinance. If your primary objective is paying off your credit card balances completely. 
If you are just looking to lower your monthly payment If you are unable to pay off a refinanced balance during the grace period. 
When to Refinance vs When to Consolidate

How to Refinance Credit Card Debt

You can refinance or consolidate credit card debt by using a balance transfer card, taking out a personal loan, or opening a home equity line of credit

Balance Transfers

A balance transfer is a way of moving debt from one or more credit cards to a new credit card with a zero percent APR for a set period of time.

Keep in mind that the introductory period usually lasts between twelve to eighteen months which means you have a limited amount of time to enjoy the perks of interest-free debt. 

Another thing to keep in mind is the fee for transferring debt from your old card onto the new one (the transfer fee usually ranges from 1%-5% of the balance owed). This will add to your debt. 

Do not use your newly acquired balance transfer card to make new purchases as you will be charged interest on the purchases you make (except you have a promotional zero percent APR on purchases). Remember, your primary reason for getting this card is to clear your credit card debt not add to it. 

You may qualify for a balance transfer credit card if you have good credit. This allows you to transfer your balance from your higher APR cards onto the newly opened card. 

Most newly opened balance transfer cards have a zero percent APR for a certain period of time which buys you some time to have cheaper debt and to be able to pay it off so you don’t have to pay interest every single month. 

When the introductory period elapses, the interest on your debt will be in the 18% – 24% range so ensure you can pay off debt within the introductory period if you are using a balance transfer card.

Personal Loan

Another option for refinancing your credit card debt is a personal loan. With a personal loan, you can consolidate your credit card debt into one loan with a single monthly payment.

In this case, you are converting revolving debt to installment debt which is good for your credit score and may be cheaper. 

Opening a Home Equity Line of Credit

You can also open a home equity line of credit to consolidate your credit card debt if you have enough equity in your house. Equity is the difference between what you owe on a home and what its current value is.

If the amount left after you subtract what you owe on your house and what its market value is is enough to offset your credit card debt, then opening a home equity line of credit may be a good way of consolidating credit card debt. 

A home equity line of credit comes with a fixed rate that should be lower than what you’d get with an unsecured personal loan or new credit card.

Keep in mind that the lender can take your house if you default on the loan. Another downside of a home equity loan is that it increases the time it will take to pay off your house. 

401(K)loans

A 401(K) loan allows you to borrow directly from your employer-retirement account and pay back with interest.

While a 401(K) loan may not affect your credit score and may offer better interest rates than an unsecured personal loan, it is a risky approach to debt consolidation. 

Borrowing money from your 401(K) fund will lower your retirement savings and can set you back financially for years.

What’s more, the fees and penalties for defaulting on a 401(K) loan outweigh the benefit of using the loan to offset your credit card debt. Hence, 401(K) loans should be a last resort to debt consolidation. 

Where Can I Get a Credit Card Refinancing Loan?

Here are a few options if you are looking for a personal loan to refinance your credit card debt: 

Banks and credit unions

A good number of banks and credit unions offer personal loans that you can use to refinance your debt. However, they usually have a higher income and credit score requirement than online lenders.

To qualify, you will need good to excellent credit as well as a good and steady income. You may even be eligible for discounts if you have an existing relationship with a bank or credit union. 

Online lenders

Online lenders are a good option if you don’t qualify for a bank loan. While banks and credit unions require at least good credit, you may be able to secure a loan with an online lender with fair or even poor credit.

Online lenders also offer low interest rates and quick funding.

Ensure you compare the rates with multiple online lenders to be sure you are getting the best deal. 

FAQs

Is it good to refinance your credit card?

Refinancing your credit card is a good idea if you have a huge credit card debt and good to excellent credit. This allows you to transfer your existing debt obligation onto a new card with better terms and a better pricing structure. 

Does refinancing hurt my credit

Yes. refinancing will hurt your credit score temporarily because of the hard inquiry on your credit report and also because of the immediate effect of taking on a new loan. 

What is the difference between credit card refinancing and consolidation?

When you refinance a credit card, you transfer debt on the card to a new credit card with more favorable terms and a better pricing structure. On the other hand, debt consolidation is the act of combining several loans into a single loan with one monthly payment or moving multiple credit card balances to a single card with a very high credit limit. 

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Sources

Abraham is the Assistant Country Manager for Financer US. He is a research analyst with a strong background in economics and an avid interest in personal finance and investing. He has written hundreds of articles on personal finance, investing, cryptocurrencies, technology, and iGaming.

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Last Updated: November 28, 2022

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