Dealing with a bunch of credit card debt? You're not alone. In fact, according to the most recent report from the Federal Reserve, Americans have a combined total of $996.8 billion in revolving credit, most of which is consumer credit card debt. If you're part of this statistic, now could be a good time to figure out how to refinance your credit card debt so you can become debt-free faster.
No matter if you’re tackling a huge chunk of debt for the first time, figuring out how to pay off debt is a sound choice. After all, being able to manage your financial situation well is going to help you feel less stressed and better equipped to reach other goals, like saving for a house or putting money into retirement funds.
It can seem overwhelming at first, but learning the best way to refinance credit card debt is just a matter of picking the right strategy for you. Here are some ways you can refinance your debt and determine which strategy is best suited for your situation.
- What is credit card refinancing?
- Options for refinancing credit card debt
- Use a balance transfer credit card
- Consider a personal loan
- Use your home equity
- Use a specialized credit card debt service
- Borrow money from your 401(k)
- Consider a debt management plan
- How to pay off credit card debt faster
- Is refinancing credit card debt a good idea for you?
What is credit card refinancing?
Credit card refinancing can be accomplished a few different ways, but typically it involves you transferring outstanding credit card debt to another type of loan or to a new credit card from a different credit card company. Credit card refinancing can be especially helpful if you're paying a high interest rate right now, due to taking out cash advances or having a poor credit score.
Typically, you’ll transfer a balance from a card with a high interest rate to another credit card or other loan that offers a lower interest rate. For example, if the APR with your current card is 22% and you decide to transfer the balance to another credit card with a 16% APR. In this case, you’re saving yourself 6%. The goal of credit card refinancing is to save money on interest so that you can make larger payments toward the principal amount of money you owe. Being able to put extra money toward your debt means you could get out of debt faster.
Debt consolidation is another term that’s similar to credit card refinancing. In this case, you’re taking several loans — or several credit card accounts — and moving them to another type of loan. In the process, you can combine multiple debts into one loan or line of credit. That way, you’ll be making only one monthly payment and you would be able to pay your debt faster. This strategy assumes you can get a more favorable interest rate on the new loan as well.
Options for refinancing credit card debt
As for how to refinance credit card debt, there are several different ways to do it:
- Use a balance transfer credit card
- Consider a personal loan
- Use your home equity
- Borrow money from your 401(k)
- Consider a debt management plan
All of these options can work, but you’ll want to consider things like your credit score and credit history, how much cash you have on hand, your income, and your overall debt load. You also want to consider how motivated you are to pay off debt as fast as you can or if you need some help and would be better off with a slower plan with lower monthly payments.
Each of these options has both advantages and disadvantages. Let’s explore all of them so you can decide which approach to refinancing credit card debt is best for you and your personal finance situation.
Use a balance transfer credit card
Consider a balance transfer if you feel you can trust yourself to get a new credit card and not spend more money on it. Ideally, you want to find a card with an introductory 0% APR. These types of cards offer a period of time where you won’t be charged interest. Some of the best balance transfer cards offer over a year of time at the intro APR.
To use a balance transfer, most credit card issuers require you to have a decent credit score to qualify for an introductory APR. And as long as you pay off the balance during the introductory period, you could save boatloads of cash in interest. Otherwise, the money you still owe will be subject to the regular APR once that intro period is over.
There may also be a time-frame for when you can qualify for the 0% APR. For example, a card may have the stipulation that you as the cardholder need to make a balance transfer within 45 days of account opening to qualify for the 0% APR. Make sure to check the fine print when deciding on a new credit card so you’re well within the requirements to get the introductory APR offer.
And even if you don’t qualify for a 0% APR credit card, it’s still possible to refinance credit card debt by finding a card with a lower APR. Even if it’s a few percent lower, it could save you a lot of money over time.
Keep in mind many card issuers charge a balance transfer fee, which is usually around 3%. Some cards also charge an annual fee, so you’ll want to figure out if it’s worth it to fork over the cash before you apply for the card and pay the transfer fee.
This method is best for those who have a small amount of debt and can pay it off within a year or so. That’s because you’re limited in how much you can transfer over, which is typically up to your new credit limit. If you can't move all your credit card debt, you can still try to move the debt you are paying the highest interest rate on. Every bit of interest you can knock off your debt can save you in the long run and get you to debt-free status quicker.
To find the best cards, check out our list of the best balance transfer cards. Be sure to take note of the recommended credit score needed to qualify.
Consider a personal loan
A personal loan gives the opportunity to borrow a certain amount of money so you can consolidate your credit card debt. These types of debt consolidation loans typically offer a lower interest rate than your credit card. However, you’ll likely need to have excellent credit to qualify for the best rates. Some lenders also charge what’s known as an origination fee, which you’ll need to pay for the privilege of taking out a personal loan.
Using a personal loan for debt consolidation can help you manage payments since you’re only making one payment instead of multiple ones. If you have a lot of credit card debt, this is a great option as it’ll keep you more organized and paying at a lower rate. Since most personal loans allow you to borrow more, it’s best if you have a large amount of debt to pay off.
If you plan on paying off your debt in less than five years, a personal loan may not be the best choice. You may be better off using a balance transfer or making higher monthly credit card payments. That’s because you may pay more for a personal loan if your lender charges an origination fee plus an interest rate. By sticking with your credit cards you also avoid taking a hit from a hard inquiry to your credit report.
You can find some of the best personal loans and rates online, at your local credit union, or at a bank. Look at your monthly payments to make sure you can afford them.
Use your home equity
If you own a home, you can tap into your house's value and take out a home equity loan or home equity line of credit:
- A home equity line of credit (HELOC) works much like a credit card. You can borrow as much as you need, up to a certain limit. During the draw period — a set amount of time the lender gives you to borrow up to your credit limit and draw on the amount again when you repay the principal — you’ll make interest-only payments on the amount you borrow. Once this period is over, you’ll then need to repay the entire loan, including the principal.
- A home equity loan, on the other hand, gives you a lump sum loan amount with a fixed interest rate, and you pay it back in an agreed amount of time. Both types of loans allow you to use that money to pay off your credit card debt.
A home equity loan or HELOC is best for those who have a lot of credit card debt to refinance and want to pay it off over a longer period of time — typically 10 years or more. How much you can borrow depends on your home equity.
To determine your home equity, take your home’s current value and subtract how much you still owe. For example, if your home is valued at $250,000 and you still owe $175,000, you have $75,000 worth of home equity. Lenders will then take this number to determine how much you can borrow, which is typically up to 85% or up to $63,750 using the above example.
However, the lowest rates tend to go to those with the highest credit scores. You also risk losing your home if you can’t keep up with payments.
Shop around at your local credit union or bank to find the best rates. There are also plenty of online lenders, which sometimes offer better rates.
Use a specialized credit card debt service
There are services like Tally that specialize in helping people manage their credit card debt. To get the most out of using Tally, you need to qualify for its credit line, which requires a minimum credit score of 660. During this process, Tally does a soft pull that won't affect your credit score. It analyzes your debt balances and APRs to figure out the best way to help you pay down your credit card debt.
Once you’re approved, your high-interest debt is moved over to the new line of credit from Tally. If you link credit cards to the app that have a lower interest rate than the Tally credit line, Tally pays just minimum payments on those cards. You also have the option to turn off the automatic minimum payment feature. In that case, Tally will remind you to pay that bill, and you can make credit card payments in the app or directly with the card issuer.
You’ll receive one statement per month from Tally with a minimum payment due. The minimum payment includes interest on the Tally credit line, the amounts Tally paid to your different card issuers that month, plus 1% of your Tally credit line balance so that you are effectively chipping away at your overall balance.
Borrow money from your 401(k)
Borrowing money from your 401(k) isn’t the best choice when it comes to refinancing or consolidating credit card debt.
First, you could significantly impact your retirement, and there may be tax implications. If you’re younger than 59.5 years old, you could pay taxes on the amount you borrow.
Secondly, you’re only permitted to borrow up to 50% of your account balance, up to $50,000. The IRS also requires you to pay back the loan in five years.
Unless you’ve exhausted all options, it’s probably best to avoid this one. The upside is that a 401(k) loan doesn’t require a credit check, and rates may be lower than credit cards, though that depends on your employer-sponsored plan.
If you do go this route, talk to your 401(k) provider for further details.
Consider a debt management plan
There is no shame in asking for help. If you owe a lot in credit card debt and can’t seem to keep up, consider credit counseling. Nonprofit organizations can help you create a debt management plan and work with your creditors to create a financial plan to pay back your loans.
Typically the way a debt management plan works is that you deposit money with the credit counseling organization, and they use that to pay your creditors. There are usually fees for this service, which can include an ongoing monthly and set-up fee.
Using a debt management plan could be worth it if you don’t trust yourself to make on-time payments and you want someone to negotiate lower rates and follow a set payment plan on your behalf. In many cases, these organizations can help you negotiate lower monthly payments or interest rates and pay off your debt within 36 to 60 months.
If you decide to go this route, be sure to thoroughly vet your options. Search for one that is accredited by the National Foundation for Credit Counseling (NFCC). Sadly, there are some shady organizations out there, so be sure to research your options before committing. You should also be aware that debt management is different than debt settlement, which involves a for-profit company negotiating with your creditors and lenders for you to pay back less than you owe.
How to pay off credit card debt faster
Paying off credit card debt faster can be done through a combination of lowering interest rates, increasing your monthly payment amount, and making more payments. If possible, stop using your credit cards to avoid racking up more debt.
Adding more money to your debt repayment is as simple as making extra payments. Start tracking your income to understand where your money goes each month to see where you can cut back and apply the difference toward your debt. If you’re ambitious, consider earning more money by working overtime shifts or dedicating a few hours a week to a side hustle.
You can also use debt reduction strategies like the debt snowball method and the debt avalanche method. This can help a lot if you also are dealing with different types of debt, like auto loans or student loans, that you can't consolidate with your credit card debt. The debt avalanche method involves prioritizing your debt with the highest interest rate, and the debt snowball method involves prioritizing debts with the smallest dollar amounts. The debt avalanche method is the fastest and cheapest way to pay off debt, and the debt snowball method is the quickest way to reduce your number of accounts with open balances and can be more emotionally satisfying.
As long as you have a solid plan in place and are committed, it’s possible to pay off your debt faster.
Is refinancing credit card debt a good idea for you?
Credit card debt comes with some hefty interest rates compared to other kinds of debt. In other words, you’re potentially going to pay a lot more for your loan if you keep your current credit card and stick with making only the minimum payments. If you have high credit card balances, it also means you likely have a high credit utilization ratio. This can negatively impact your credit score and make it even harder to qualify for good interest rates.
But whether you have excellent or fair credit, consider refinancing or consolidating credit card debt to see if you can lower your APR. Doing so could help you save hundreds or thousands of dollars throughout the lifetime of your loan, and there are a lot of financial institutions offering credit card and loan products that can help, no matter your credit history. As your credit score improves, you can always refinance again for an even better interest rate.
You’ll want to consider the potential consequences of each credit card debt refinancing method, too. For example, if you take out a home equity loan, you could risk losing your home if you’re not careful with repayments. Or you may end up paying a higher fee if you take out a personal loan with an origination fee. That said, you may also save by no longer paying late fees since you'll be hopefully dealing with a single monthly payment that you can afford.
At the end of the day, understanding why you got into debt in the first place will help prevent debt from happening again. It also requires you to have a solid view of your financial picture, including other goals, to help you figure out if refinancing is the right choice for you.