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Credit Card Refinancing: What Is It And Who Should Use It?

Miranda Crace6 minute read
UPDATED: January 27, 2023


You’re not alone if you have credit card debt you need to pay off. In fact, according to the Bureau of Consumer Financial Protection, over 175 million Americans held at least one credit card as of September 2021. And over the previous few years of economic unpredictability, many consumers have taken on credit card debt to help them through a tough time.

Fortunately, there are several strategies you can use to pay off your credit cards. One of those strategies is credit card refinancing. Let’s discuss how you can refinance your credit card debt to eliminate your outstanding balances.

What Is Credit Card Refinancing?

The term “credit card refinancing” refers to the practice of paying off debt from one or multiple credit card accounts with a personal loan or credit card. This strategy has several benefits, but the primary reason many consumers refinance their credit cards is to lower their interest rate and, therefore, decrease their monthly debt payments.

Since credit cards typically use a variable interest rate based on the federal funds rate, consumers may have inconsistent monthly payments. A variable rate also means a credit card’s interest rate could increase. By refinancing, a borrower can swap their fluctuating, high-interest credit card debt for a loan with a lower fixed interest rate or a balance transfer credit card featuring a more forgiving interest rate for a period of time.

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Credit Card Refinance Vs. Debt Consolidation

Even though credit card refinancing may sound similar to debt consolidation, the two are slightly different. Debt consolidation occurs when a borrower combines multiple forms of debt into a single payment through a loan. Once approved for a loan, the consumer will receive a lump sum, which they can use to pay off credit cards, medical bills, student loans or other debt. They will then pay off the loan by making consistent monthly installments to their lender.

On the other hand, a credit card refinance is only used for debt accrued from the use of a credit card. However, if you go the personal loan route to refinance your credit card, you’ll still receive funds from your lender to pay down your balances. You’ll also have a single monthly payment to the lender until you pay the loan back in full.

If you’re torn between a credit card refinance and debt consolidation, you can assess your current debts to help you determine which option would be the best fit. A debt consolidation loan might work better for you if you have minimal credit card balances but have other debts you’d like to pay off. But if you only have outstanding credit card balances, refinancing your debt could be more beneficial.

How To Refinance Credit Card Debt

Once you’ve decided that refinancing your credit card debt is the best repayment option for you, you can go about it in one of two ways: a personal loan or a balance transfer credit card. Again, the most beneficial method will depend on your financial situation.

Before you pick one, carefully consider each option’s advantages and disadvantages.

Refinancing With A Personal Loan

Using a personal loan to refinance your credit card debt is relatively straightforward. You choose a lender, like a bank, online lending platform or credit union, that offers the best interest rate and terms before filling out and submitting a loan application. Once you’re approved, you will use the lump sum to pay off each credit card, or your only credit card, and then start making monthly payments to the lender.

Because personal loans come with longer loan terms, refinancing with a personal loan is often preferred for borrowers with substantial debt. For instance, let’s say you have $5,000 of credit card debt and take out a personal loan for the same dollar amount. If your loan term is 5 years and your interest rate is 5%, you’d have a monthly payment of $94.36.

You might be able to reduce your monthly payment even more by opting for a secured personal loan. This type of loan requires collateral but often comes with a lower annual percentage rate (APR). To continue with our example, if you could land an interest rate of 3%, your payment would be $89.84, making it easier for you to pay off your debt.

Unfortunately, using a personal loan to refinance your credit cards comes with some drawbacks. If you have a low credit score, you might have difficulty qualifying for this type of financing. You also might have to pay origination fees or prepayment penalties.

Furthermore, some lenders could have a minimum loan amount. That means you may be required to borrow more money than what you currently owe to your credit card providers. And if you can’t repay the loan, you might end up with more debt than you started with.

Refinancing With A Credit Card

The most effective way to refinance your debt with a credit card is often through a balance transfer. After receiving approval from the credit card company, you can use the balance transfer card to pay off any other credit cards you have, whether it be one or more than one. This process essentially transfers the balance of a single account or multiple accounts onto a new card (which is why it’s called a balance transfer).

Most balance transfer cards promote a low or no APR introductory period, making them a better option than a standard credit card. This period can help you pay off debts faster while reducing your interest and fees.

Using a balance transfer to refinance your credit cards works well for consumers with a relatively small amount of debt. But if you have thousands of dollars in credit card bills, it might take you longer than expected to pay off your balance, meaning you’ll start to accrue interest once the promotional period ends.

Besides the promotional rate, another advantage of a balance transfer is that your payment amounts will be more flexible than with a personal loan. In other words, you can pay as much or as little as you want, whenever you want, within the repayment terms outlined by your credit card provider.

In addition, the qualification requirements are usually less strict than personal loans, making a balance transfer card an excellent opportunity for borrowers with poor credit. However, your provider will most likely charge a balance transfer fee and late fees if you don’t make on-time payments. It’s also worth noting that many credit card companies don’t allow balance transfers between cards issued by their company.

Credit Card Refinancing FAQs

While credit card refinancing can seem complicated, it doesn’t have to be. By learning more about the process and the situations where it works best, you can better determine if it’s right for you. Learn more about refinancing your credit card debt by checking out the answers to these frequently asked questions.

Can I refinance my credit card debt if I have bad credit?

Poor credit could mean you’re limited on which options you can qualify for. In many cases, lenders will require a borrower to have a credit score of 650 or higher for a personal loan, but you may be able to find an option that accepts a lower score if you use collateral.

With bad credit, you could have better luck securing approval for a balance transfer card, though your interest rate after the introductory period may be higher than expected. If you only have a relatively small amount of credit card debt, this refinancing option may be the way to go.

Does a credit card refinance affect my credit score?

Refinancing your credit card debt can affect your credit positively and negatively. During the application process for a loan or credit card, the lender or issuer will pull a hard inquiry against your credit report, which can lower your credit score by a few points. But as long as you make your monthly payments on time and chip away at your debt, your credit score should see an improvement in the long run.

Is a credit card refinance a good idea?

A credit card debt refinance won’t be perfect for everyone. To help you decide if it’s the right choice for you, carefully analyze your credit score and debts. If you feel like you can pay off your credit cards in a short period of time with a debt management plan, you might decide not to refinance. If you think you need more assistance to pay off your credit cards, refinancing your credit card debt could make a significant difference.

Final Thoughts

Credit card refinancing can be accomplished through a balance transfer card or a personal loan. If you think you’ll need more than 6 months to a year to pay off your debt, a personal loan might be the right repayment plan. You’ll have a lower interest rate and more consistent monthly payments than you would’ve had keeping your debt on your credit cards. But a balance transfer might make more sense if you don’t have as much debt and simply want to pay less in interest or pay off your debt in less time than you otherwise would.

To find out what personal loan terms and rates you can qualify for, fill out an online application and take the first step to paying off your credit card debt.

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Miranda Crace

Miranda Crace is a Senior Section Editor for the Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate, and personal loans for over 10 years.