What Is Credit Card Refinancing, and How Does It Work?
While credit card refinancing isn’t as cut and dry as refinancing a mortgage, it can help streamline your debt repayment plan.
Contributing Writer at Tally
May 17, 2022
Life comes at you fast, whether it’s an unexpected layoff, hefty medical bills or a new baby on the way. In any of these cases, you may face a seemingly unmanageable amount of high-interest credit card debt. And if so, you’re not alone.
Managing and lowering your credit card debt while tackling work, family obligations and everyday life can seem overwhelming. But, once you take that first step of addressing your financial health, you’ll be better suited to improve all other aspects of your life.
Credit card refinancing is one method you can use to start chipping away at your debt. Here’s everything you need to know about that process.
What is credit card refinancing?
Credit card refinancing involves moving a credit card balance from one card to another or taking out a lower-interest personal loan (often called a debt consolidation loan) to pay off your credit card. Another option is to use a credit card payoff app.
Refinancing with a balance transfer credit card
If you have a high balance and interest rate, you can transfer what you owe onto a different card with a lower introductory rate — in many cases, as low as 0%. The introductory period typically lasts 12 to 18 months, but some can go as long as 24 months.
The longer the promotional period, the more time you’ll have to become debt-free without the burden of interest expenses from your lender.
Remember that most balance transfer credit cards will charge you a 3% to 5% balance transfer fee. This will usually be less than the interest you’d pay on a normal credit card, but it’s worth noting.
Refinancing credit card debt with a no-interest credit card typically requires a good credit score or, in some cases, excellent credit.
Refinancing with a debt consolidation loan
You can also perform credit card refinancing using a debt consolidation loan. You can take out a debt consolidation loan, which typically has a lower interest rate or annual percentage rate (APR) than a credit card, and pay off one or more credit cards with it.
Additionally, if you pay off more than one credit card with a debt consolidation loan, you’ll only have one monthly payment to make on the new loan. Plus, most credit cards have a variable interest rate, but credit card debt consolidation loans are generally fixed-rate loans.
Lenders can often deposit the loan proceeds into your bank account in as little as one business day, so you can quickly repay your debt.
Some credit card consolidation loans come with an origination fee or a prepayment penalty, and they can sometimes be significant. Read the loan terms and disclosures carefully and compare these fees to the interest you’d pay on your credit card before accepting a loan offer. Also, look into several loan options to ensure you’re getting the lowest rates.
Refinancing with a credit card repayment app
There are also credit card repayment apps that combine all your credit card payments into one payment. Tally† offers this service along with a personal line of credit that may have a lower interest rate than credit cards. You can use this line of credit to refinance your credit card debt.
Does receiving a balance transfer offer qualify you for credit card refinancing?
Have you ever received a flashy credit card offer in the mail? If so, the credit card company may have promised you low interest rates for a select number of months. Just because you’re the recipient of this offer, however, doesn’t mean you’ll qualify if you go through the application process.
To procure a no-interest credit card, you’ll typically need a FICO Score of 690 or higher when you go through the credit check.
If you don’t meet the required creditworthiness, you have two options:
You can try a different debt repayment method; or
Work toward improving your credit score.
How to improve your credit score
Before we outline some successful practices for improving your credit score, let’s define how a FICO Score is calculated.
The following categories are considered when calculating your credit score:
Payment history (35%)
Amounts owed (30%)
Length of credit history (15%)
Credit mix (10%)
New credit (10%)
As such, the steps you can take to improve your credit score include:
Paying your bills on time: This seems simple, but when you commit to prioritizing paying bills over funding new purchases, you’ll start seeing an increase in your credit score. Using the FICO scoring model, your payment history — the highest-rated factor — accounts for 35% of your credit score. This means that the more consistently you pay your bills on time, the better your payment history will be and the better your credit score will be.
Submitting recurring bill payments that aren’t automatically counted: Did you know that you can get rewarded for paying your utilities and cell phone bill on time? Experian, one of the three main credit bureaus, offers a Boost program that gives responsible borrowers the chance to add their consistent cell phone and utility payment histories to their credit files.
Keeping unused credit card accounts open: Credit utilization is the second-most-important factor in calculating your credit score. When you have accounts open that have a zero balance, your credit ratio will naturally be lower. This practice comes with a major caveat: Be careful about keeping cards open that have annual fees if you’re not using them.
By employing the practices listed above, you could see an increase in your credit score in as quickly as six months to a year.
How does refinancing credit card debt affect your credit score?
Refinancing your credit card debt can affect your credit score in the following ways:
Hard credit inquiry: No matter which refinancing option you elect to take, you will need to apply for it. This application will include a hard credit inquiry, which can negatively impact your credit score for up to 12 months.
Length of credit history: Length of credit history accounts for 15% of your credit score. When you open a new credit account, it will be calculated in your average, decreasing the age of your credit. That said, this factor isn’t necessarily going to sink your credit score, since it carries less weight than payment history and amounts owed.
Amounts owed: If you open a balance transfer credit card or a line of credit to pay off your credit card, you’ll increase your credit limit while keeping your credit usage the same. This will decrease your credit utilization ratio, which is a key factor in the amounts owed variable of the FICO scoring model. If a debt consolidation loan is your preferred refinance method, the impact is different. A debt consolidation loan will essentially convert your credit card balances to an installment debt. This loan will not be factored into your utilization ratio and may improve your credit score, depending on your personal factors.
Is it a good idea to refinance credit card debt?
If you have a good credit score and high-interest debt you’d like to pay off faster at a lower interest rate, it may seem like there’s no downside to refinancing your debt. However, there are a few things to keep in mind:
Read the fine print closely:Balance transfer credit cards and loans may come with fees. You’ll want to be aware of these to ensure you’re not paying more than you would with your current credit card.
The debt amount is still the same: Remember, just because you’ve refinanced your credit card doesn’t mean the debt amount has changed. Plus, if you use the balance transfer method and don’t pay off the balance before the introductory period is over, you could find yourself in the same position.
Have a debt repayment plan: If you use the balance transfer method, identify how long you have until your introductory period ends. From there, break up your current balance into bite-sized chunks you can pay off during that time. However, whichever refinancing method you use, build your monthly budget around the debt repayment and prioritize it before any extraneous spending.
Earn extra income to pay down debt: Whether you can take on an extra shift at work or pick up a side hustle, having an additional income stream can ensure you eliminate your balance as quickly as possible, saving you on interest charges.
If you’ve read the terms and conditions of your new credit card and have a plan in place, refinancing your credit card can be an effective method for getting out of debt.
Credit card refinancing can accelerate your financial stability
Refinancing your credit cards can help you speed up your debt repayment and achieve a more stable financial situation. It does so by reducing your interest charges and, in some cases, lowering your number of monthly payments to just one.
Paying off credit cards is a challenging but achievable goal. Refinancing your debt through balance transfers or personal loans are great ways to reduce the amount of money you owe to lenders.
Tally’s† credit card management app can also help you in your credit card refinancing. Tally manages credit card payments by offering qualified users a lower-interest personal line of credit, so they can efficiently pay off their higher-interest credit cards.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.