How to Refinance Credit Card Debt

The national average annual percentage rate (APR) for credit cards is 20.93%. However, if you have poor credit, the average jumps to 29.65%. You may have an even higher interest rate if your lender is charging you a penalty APR.

One of the ways to secure a low interest rate is by refinancing your credit cards. In this article, we’ll take you through how to refinance your credit card debt. We’ll cover what credit card refinancing is, how to do it and the benefits of doing so. By the end of this article, you should have a much better understanding of what you can do to get yourself out from underneath high-interest debt.

Refinancing: The Basics

You may be familiar with the term “refinancing” as it relates to homeowners and mortgages. When you refinance a mortgage, you negotiate with your lender to secure a lower interest rate. Doing so does not reduce the principal (total loan amount) that you must repay, but it will save you money in the long run by reducing the amount you’ll pay in interest.

Conceptually, the same thing happens when you refinance a credit card. Refinancing your credit card accounts means lowering the interest rate applied to your existing debts. However, though it’s possible to refinance a credit card by negotiating with your lender, it’s not the only way to do so. Other financial products that you can use to refinance credit card debt include:

Personal loans.
Balance transfer credit cards.
Home equity loans.
Credit card payoff apps, like Tally.

By refinancing, you end up making repayment easier. The lower interest rate cuts down how much interest your lender charges you. Because there is less interest, the total amount required to pay off debt is lower. Refinancing can be an effective part of a debt management plan.

How to Refinance Credit Card Debt

Let’s take a deeper dive into how to refinance credit card debt. Below are five of the primary methods you can use to lower your interest rates.

1. Take Out a Personal Loan

A personal loan is a loan that generally allows you to use the funds as you see fit. In terms of refinancing, you may also see this referred to as a debt consolidation loan. When you take out a loan, you receive a lump sum of cash that you can use to pay down debt.

These loans are an effective credit card consolidation option to help pay off high-interest debt. They are also useful for paying off other high-interest debt like those from student loans. So long as your rate on the personal loan is less than that on your existing debts, you can use it to refinance.

For instance, let’s say that you have three credit cards. One carries a $2,000 balance, one carries a $3,000 balance, and one carries a $4,000 balance. The interest rate on all of them is 18%. You open a personal loan for $9,000. Your new loan has an interest rate of 7%. You use the loan to immediately pay off your credit card balances. Your monthly payments now go toward paying off the loan.

Because the loan has a lower interest rate than your credit cards, you will save money on interest. Additionally, if the loan has fixed rates, you can gradually pay off the interest over the duration of the loan term. Knowing precisely how much your minimum payment is each month could help with budgeting and make repayment easier.

Personal loans are a type of unsecured loan. An unsecured loan does not require collateral, which means you will not have assets seized should you fall behind on payments.

2. Use a Balance Transfer Credit Card

A balance transfer card allows you to move all of your existing credit card balances onto one card. The balance transfer card typically offers borrowers a promotional APR, sometimes as low as 0%.

This means that you can make credit card payments without worrying about accumulating interest during the introductory period, so long as you at least make the minimum monthly payment. The repayment terms often state that if you make a late payment, the promotional period ends automatically, and you are subject to late fees.

There is a balance transfer fee associated with the card, usually around 3% of the total balance you’re transferring. So if you transfer $9,000 onto the balance transfer card, you’ll have $270 added to the balance. But since the balance transfer fee is less than your current credit card APR, it’s a move worth making.

3. Open a Home Equity Loan

Another option for consolidating is taking out a home equity loan, otherwise known as a HELOC. A HELOC is similar to a personal loan in that you receive a lump sum of cash that you use to pay down your high-interest credit card debt. The rate of interest on the loan should be less than that on your credit card for this option to make good financial sense.

Home equity loan offers often have the lowest interest rate because they are secured. A secured loan requires you to put up collateral. In this case, you are borrowing against the equity that you have in your home. Only homeowners are eligible for HELOCs.

4. Negotiate With Your Credit Card Company

You may feel as though it’s a waste of time to negotiate your APR with your credit card company, but giving it a shot may be worth it. Many credit card companies are willing to listen and negotiate your rate, so long as you are in good standing. You should have a good credit history with the company, having made on-time payments for a while.

The longer the history you have with your credit card company, the more likely they are to negotiate the rate. Even if you negotiate your APR down by one percentage point, you’ll end up saving money on interest.

5. Use a Credit Card Payoff App

Another way to refinance credit card debt is by using a payoff app. These apps give you a low-interest line of credit and uses it to automate your credit card payments.

They’ll pay off your credit cards in the most efficient way possible. All you have to do is make a single monthly payment to the app. Using these apps can help you pay off debt more quickly, allowing you to start saving money and maybe even padding your retirement accounts.

The Benefits of Refinancing Credit Card Debt

As if simply saving money on interest is not enough, below are two other benefits associated with learning how to refinance credit card debt.

Improve Your Credit Score

During the refinancing process, your credit score will take a temporary hit because of the new credit inquiry needed to take out a loan or open a balance transfer card. However, you will be paying off credit cards, which could increase your available credit limit and improve your credit utilization ratio. The less debt you have to your name, the better your credit report.

Manage Payments Easier

If you have multiple credit cards, you may find it challenging to make your monthly payments, or perhaps you lose track of due dates. These missed payments eventually lead to late fees and penalty APRs.

When you refinance, you will likely end up reducing the number of payments you must make per month. Instead of paying off multiple credit cards, you now only need to make one monthly payment. And if you go the route of a loan, this amount may be fixed, making it even easier to manage.

Refinancing Your Credit Card Debt

Credit card debt can be problematic because the associated interest rates are so high. When you refinance a credit card, you either negotiate with your credit card company or move your debts to a financial product with a lower interest rate. These options include:

Personal loans.
Balance transfer credit cards.
Home equity loans.
Credit card payoff apps.

When you refinance a credit card, you not only potentially save money on interest, but might also improve your credit score as well. Be sure to talk with a financial advisor to learn more about which financial product is best for refinancing debt.