What is credit card refinancing?

Posted by Martina Birk on Thursday, May 2, 2024
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The average American has $5,805 in credit card debt, according to 2022 data from TransUnion. 

If you’re looking to pay down high-interest credit card debt, credit card refinancing may help save you money on interest and speed up the process. With this strategy, you move your credit card balances to a new card with a lower rate.

Before you decide on this option, it’s important to understand the pros and cons. 

A closer look at credit card refinancing

With credit card refinancing, you apply for a new credit card — ideally with a 0% introductory rate — and transfer your existing balances to it. Introductory periods are required to last a minimum of six months, and can be up to 21 months or more. This way, you have the opportunity to repay your credit card debt with no interest. 

However, when the introductory period ends, the credit card will return to its usual rate, which may be higher than what you were paying on your other cards. Additionally, some of these credit cards have a balance transfer fee that’s either a flat rate or a percentage of the total balance. Before transferring your balances to a new card, do the math to ensure that this option is worth it.

Pros of credit card refinancing

Credit card refinancing offers the following benefits:

  • Low or 0% introductory rate: If you’re able to transfer your balances to a card with a low or 0% introductory period, you’ll save money and pay off your principal balance faster.
  • Simplifies repayment: When you refinance, you move several credit card balances to one card. This simplifies debt repayment since you only have to keep track of one monthly payment. Doing so can also reduce your chances of missing a monthly payment and having to pay a late fee.   

Cons of credit card refinancing

Credit card refinancing may not be wise for everyone. Here are some cons to consider:

  • Balance transfer fee: You’ll likely have to pay a balance transfer fee, which is usually 3% or more of the amount you’re transferring. This could outweigh the benefits of credit card refinancing. 
  • May not qualify: You generally need good to excellent credit to qualify for credit card refinancing. If your credit card debt is bringing your credit score down, you may not be eligible. 

Credit card consolidation

Credit card refinancing is just one way to simplify your credit card debt. You may also want to consider credit card consolidation.

With this latter option, you take out a personal loan with a lower interest rate to repay your credit card debt. You then pay off the new lender in monthly installments. Online lenders, banks, and credit unions offer credit card consolidation loans.

However, you’ll need to have good credit to qualify for a low interest rate. A good credit score ranges from 670 to 739, according to the FICO scoring model.

Example: If you have a credit card balance of $8,500 with a 17.99% interest rate, and it takes you 36 months to pay off this debt, you’ll spend $2,561 on interest alone. If you take out a credit card consolidation loan for $8,500 at a 6.99% interest rate and the same loan term, you’ll only pay $947 in interest. This means you’d save around $1,614 with credit card consolidation.

Is credit card refinancing right for you?

Credit card refinancing may be a good idea if:

  • You have high-interest credit card debt. Credit card refinancing may save you money in interest if you can get a lower rate. Plus, paying less in interest may allow you to put more toward your debt to pay it off faster.
  • You have a good credit score. While you may qualify with a lower score, you won’t get the best loan terms or lowest interest rate.
  • You can afford the monthly payments. Credit card refinancing may or may not lower your monthly payments, but it can simplify them. Before applying for a new credit card, make sure you can afford the monthly payment to avoid getting further in debt. 

That said, you may not want to consider credit card refinancing if:

  • You have a low credit score. It’ll be harder to qualify if lenders evaluate your credit and don’t believe you can make your payments on time. 
  • You already have a clear debt payoff date. If you run the numbers and know you can pay off your credit card debt in the near future, you may not want to go through the trouble of applying for a new card and paying any fees. 

Alternatives to credit card refinancing

Credit card refinancing isn’t the only way to tackle high-interest credit card balances. Here are a few other options to consider:

  • Credit card consolidation loan: With a personal loan, you know exactly when you can expect to pay off your debt, since you have a set repayment term. You also have a fixed interest rate that’s likely lower than the rates on your credit cards, as well as a fixed monthly payment, making it easy to budget for your payments. 
  • Home equity loan: If you have equity in your home, you can borrow up to 80% of it and use that money to pay off your credit cards. Home equity loans tend to have lower interest rates, but you may have to pay closing costs and other fees. And since you use your home as collateral, you run the risk of losing your home if you fail to repay the loan.
  • Credit counseling: Credit counselors can help you manage your money and implement specific strategies to pay off your debt. Generally, working with a credit counselor is free, but there may be a fee involved if a counselor organizes a debt management plan for you. You can find a credit counselor through the Financial Counseling Association of America

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