The Quick Guide to Credit Card Refinancing

Credit card refinancing can help you save money on interest and simplify your monthly payments. That said, it’s not without its potential drawbacks. Here’s what you need to know.

Updated: May 8, 2023

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Credit card refinancing can help you save money on interest and simplify your monthly payments. That said, it’s not without its potential drawbacks. Here’s what you need to know before you open a new line of credit to pay off an old one. 

Key takeaways

  • If you’re overwhelmed with credit card debt, refinancing can help you consolidate and simplify your payments. 

  • Credit card refinancing can help you secure a lower interest rate on your debt, saving you money in the long run1

  • Two of the most popular ways to refinance credit card debt: through a credit card consolidation loan, or by taking out a balance transfer card. 

What is credit card refinancing? 

Credit card refinancing involves opening a new line of credit to pay off an old one. If your new line of credit has a lower interest rate than your old one, you could save hundreds if not thousands of dollars in interest payments over the life of your debt.

Since most credit cards come with traditionally high interest rates, it’s usually advisable to refinance with a lower-interest option, like a personal loan. When you refinance, all your debt is consolidated into a single new loan with a single new payment. This can also help reduce overwhelm and allow you to pay down your debt faster over time. 

Benefits of refinancing credit card debt

Credit card refinancing can help you get out of debt and reach your financial goals faster. Here are a few of the most significant advantages.  

You can lower your interest rate

Refinancing credit card debt can help you secure a lower interest rate. Especially now, with the Federal Reserve raising interest rates to combat inflation, your savings could be substantial. 

In recent years, the average credit card interest rate has topped 20%, according to Federal Reserve data. Personal loans, however, currently have rates hovering around 10%. By refinancing your debt to a lower rate now, you could save thousands of dollars in interest charges, particularly if you have a large balance.

Some financial institutions even offer balance transfer cards with 0% APR (annual percentage rate) for the first 12 or 18 months. That can help you get a jump start on paying down your debt. 

You’ll pay down debt faster

If you refinance your credit card debt to a lower interest rate—but keep your monthly payment amount the same—a higher percentage of each payment goes toward your actual loan balance instead of just toward your interest charges. That can help you pay down your debt more aggressively. Refinancing can also allow you to change the loan term. If you switch to a shorter term, you may pay higher monthly payments, but you’ll get out of debt faster. 

You’ll improve your credit

A major benefit of refinancing your credit card debt is that it can help you pay off your debts faster. Over time, this will decrease your credit utilization ratio, which can therefore help improve your creditworthiness. Of course, this is conditional on you making on-time payments and not racking up more debt—including new credit card bills—post-refinance.

Do note, however, that your credit score may temporarily dip just after you refinance. This is due to the hard credit check your new lender will have to perform to approve you for the new loan. This dip will usually be just a few points, and your credit score will soon recover.

You can consolidate multiple credit cards into one loan

Refinancing lets you consolidate multiple lines of credit into a single new balance. When all your debt is in one place, you don’t have to scramble to keep on top of multiple monthly bills. This can reduce stress, help you stay organized, and make you less likely to miss a payment. 

When you refinance through a personal loan, you’ll also get a fixed monthly payment and a fixed payment term. These set, predictable numbers can make it easier to budget each month. 

Two common methods of credit card refinancing 

There are two popular methods for refinancing credit card debt: personal loans and balance transfer cards. Let’s talk about each. 

Using a personal loan for credit card refinancing 

If you’ve been making your credit card payments on time and have a good credit score, you can take out a debt consolidation loan. This is a type of unsecured personal loan. Through it, you can borrow a single lump sum and use that money to pay off your credit cards as well as other types of debt. Afterward, you’ll be left with a single new payment, likely with a lower interest rate. 

To qualify for those lower loan rates, you’ll typically need a credit score of 670 or higher. Some lenders may also charge origination fees for taking out the loan. These fees are usually negligible: if you’re able to get an affordable fixed-rate loan, you’ll save that much (and more) in interest charges over the life of the loan.  

What to look for in a credit card debt consolidation loan 

Before you take out a personal loan, shop around and compare lenders. This will give you a better idea of the best personal loan offers available to you.

Each lender has a different fee structure, repayment terms, and interest rate offerings. Look for lenders who advertise low or no fees and flexible repayment terms. Some lenders will penalize you if you pay off your loan ahead of schedule, so keep an eye out for prepayment penalties if this is an option you’d like to have. Also be sure to do a little research on each financial institution; some have more intuitive websites, easier-to-navigate billing software, and better customer service than others. 

Pros of debt consolidation loans 

Taking out a personal loan to consolidate your credit card debt can be a great option for many borrowers. Here are some benefits to consider. 

  1. Streamlined debt management: If you have a large balance, a debt consolidation loan can help you get organized and stay on track with your payments. After you refinance, you’ll only have one payment each month instead of multiple due dates for various credit card accounts. 

  2. Easy application process: Personal loans are easy to apply for. If you qualify, online lenders will typically approve your application and deposit the funds directly into your bank account within one to three business days.

  3. Lower monthly payments: Refinancing can help you secure a lower monthly payment, both by reducing your interest rate and by giving you the option to extend your repayment period. 

  4. Big savings: Getting a personal loan is also a great way to lower your interest rate, which can save you money over the life of the loan. And unlike with credit cards, your interest won’t compound and add to the balance. 

  5. No collateral required: The best personal loans are unsecured, which means there’s no collateral required to take out the loan. That means you won’t have to worry about putting your house or car at risk if you fail to make a payment. 

Cons of debt consolidation loans 

Taking out a personal loan to consolidate your debt isn’t for everyone. Here are a few potential drawbacks.

  1. Disproportionate fees for small balances: If you only have a small amount of credit card debt, you may end up paying more in fees than you’ll save in interest charges. For that reason, personal loans are not the best choice for short-term or small loans. 

  2. Strict credit requirements: If you don’t have the best credit score, you may not qualify for a personal loan. And if you don’t have a score above 700, you may end up with a higher interest rate than you might have hoped.

  3. Impact to your credit score: When you take out a debt consolidation or personal loan, this will trigger a hard credit inquiry, which will show up on your credit report. This can have a negative short-term impact on your credit score. 

Using a balance transfer for credit card refinancing 

If you have a small outstanding credit card balance that you expect to pay off within a year or two, a balance transfer credit card can be a great option. When you open up a balance transfer card, you can move all your existing credit card balances to the new card, which will often have a lower interest rate than your previous cards.

Better yet, balance transfer credit cards frequently offer 0% APR for the first 12 to 18 months. So, if you pay off your debt within this period, you’ll pay no interest and all. Note that balance transfer cards aren’t the best strategy for large debts, as you can only transfer balances up to your credit limit. 

What to look for in a balance transfer card 

The best balance transfer cards offer a 0% introductory APR for at least the first 12 months after you open the card. Others provide this low rate for 18 months or even longer. 

Note that you may have to meet certain conditions to get a card issuer’s lowest rates. For example, you may need to make your first balance transfer within the first 45 days of account opening to secure that enticing zero-APR offer.

Before you open a balance transfer card, be sure to read the fine print. Look for card issuers that offer longer introductory periods with few conditions. Also be sure to compare interest rates. If your new card’s normal interest rates are high and you don’t pay off your debt before the end of the introductory period, you could end up in a worse situation than you started in. 

Pros of balance transfer cards

Balance transfer cards can be a great choice for borrowers with small balances as well as those who are prepared to pay off their debts fast.

  1. Significant savings: Many balance transfer cards offer an introductory 0% APR, which can save you hundreds of dollars in interest charges. 

  2. Faster debt repayment: With 0% APR, your entire monthly payment goes toward paying off your principal. This can accelerate your progress toward a debt-free future. 

  3. Easy application process: You can apply for a balance transfer card online and can get a decision within a business day.

  4. Ideal for high-interest credit card debt: Even if you can’t move all your credit card debt to your new balance transfer card, you can still move your high-interest debts. That can get you started on the debt avalanche method and save you a ton of money in interest charges.

Cons of balance transfer cards

Balance transfer cards aren’t ideal for those with high balances or long expected repayment terms.

  1. Low balance limits: How much you can transfer will be subject to your new credit limit. If your limit is low, you may not be able to transfer your entire credit card debt balance over. 

  2. Potential fees: Many cards charge balance transfer fees which are often around 3%. 

  3. Required credit score: You need a good to excellent credit score—usually at least 670—to qualify for these cards.

  4. High post-introductory-period APR: During the introductory period, the lender makes very little money from you in interest. Balance transfer cards are designed to make up for that by dramatically increasing APR once the introductory period ends. After that, interest rates can skyrocket to 17 to 30%.

Alternatives to using a personal loan for credit card refinancing 

The debt avalanche method

The debt avalanche method involves paying off your debts in the order of their interest rates, starting with the highest interest rate and ending with the lowest. This can be helpful if you’re not sure how to prioritize your payments or don’t want to go through the hassle of applying for credit card refinancing every time there’s a change in your finances.

Let's say that—excluding your mortgage—you have the following debts: 

  • $10,000 in student loans at a 6% rate

  • $5,000 in credit card debt at 10% 

  • $2,000 in car loans at 2%

You decide to begin by paying off your highest interest-rate debt first so you can save money on your interest payments as soon as possible. In this example, it would make sense to pay off your debts in order of interest rate: first your credit card (10%), then your student loan (6%), and finally your car loan (2%). Make sure to keep paying the minimum payment on all debts, even if they’re not the debt of focus at the moment.

Once those three debts are paid off completely using this method, put any extra cash toward other debts (like your mortgage) until all accounts have been completely paid off using this same strategy.

Debt snowball method

The debt snowball method is a popular way to pay off credit card debt. It involves paying off your smallest balance first, then moving on to the next smallest balance after that. The idea is that you'll see progress as you chip away at your loan payments, which will motivate you to keep going and pay off more debts.

When using this method, it's important not to focus on how much you're paying in interest—you should instead be focused on paying off those balances as soon as possible. Meanwhile, continue making minimum payments on your larger debts to avoid going into default. 

Home equity line of credit (HELOC)

If you own a home, consider using a home equity loan or a home equity line of credit (HELOC) to pay off your credit card debt. Like a personal loan, a home equity loan is a lump sum you can use for almost any purpose. However, this is a secured loan, which means your home equity (i.e., how much of your house you own versus how much the bank owns) is put up as collateral. Home equity loans are offered through banks, credit unions, and online lenders.

A HELOC is more similar to a credit card. With it, you can borrow as much as you need, when you need it, up to a certain limit. HELOCs are also available from many traditional financial institutions.

Home equity loans and lines of credit can be good options to consider if you have excellent credit since the interest rates tend to be low and the repayment terms flexible. You can typically borrow up to 80% of your home equity. 

The downside to these solutions is that they both involve a hard credit inquiry into your credit history, which will show up on your credit report. Home equity loans and HELOCs can also include closing costs, i.e., fees you’ll have to pay when you close out the loan. For smaller loans, these fees can be expensive relative to the loan amount. And remember, since you’re taking out a loan against your home, you risk losing it should you fail to make your payments.

Debt settlement 

Debt settlement is a legal process in which you negotiate with your creditors to accept less than the total amount owed. A third party usually manages this process. If you’re considering debt settlement, you should start by speaking with a credit counselor. Credit counseling organizations are often non-profits, so they’re more likely to offer you affordable, unbiased advice than for-profit debt settlement companies. They can sometimes negotiate with your creditors to help you secure a lower monthly payment. Credit counseling can also help you formulate a plan for staying out of debt after settlement.

Note that the settlement process can negatively affect your credit score, so if your goal is to repair your credit, debt settlement is not recommended. What’s more, it can come with hefty fees. Debt settlement companies charge based on how much money they can save you, and it’s not uncommon to see fees between 15 and 25%.

How much could you save with NaviRefi? 

Credit card refinancing can help you save money on interest and become debt-free faster. Just be aware of the fees and penalties that come with your chosen method. 

Balance transfers can be effective, but they come with lots of hoops to jump through. Personal loans are more popular, but they can be hard on borrowers with bad credit. And of course, there are alternatives to both of these, like paying off your debt via the snowball method, or considering some secured loan options like home equity loans. There’s no right answer for everyone. 

Ready to refinance your credit card debt? See how much you could save with a low-interest loan from NaviRefi

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

1 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.

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