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The Pros and Cons of Refinancing Your Credit Card Debt

Not to be confused with a mortgage refinance, credit card refinancing allows you to move your high-interest debt to a card with a lower interest rate.

Chris Scott

Contributing Writer at Tally

February 22, 2021

The average credit card interest rate is around 16%. If you carry a balance and are trying to get out of debt, you may be tempted to refinance. Refinancing to a lower interest rate decreases the amount of your monthly payment, saving you money in the long run. It seems like a no-brainer. 

However, refinancing your credit card debt is not that straightforward. There are both positives and negatives to consider before refinancing. In this article, we’ll start by explaining what credit card refinancing is and who is eligible. Then, we’ll take you through the pros and cons of refinancing your credit card debt so that you can determine whether it's the right financial decision for you. 

What Is Credit Card

Credit card refinancing occurs when you move your outstanding balances from an existing lender to a new lender. This is typically done when there is a lower interest rate available. By shifting to a lower interest rate, the total repayment value shrinks. 

What Is the Most Common Credit Card

The most common credit card refinancing method is a balance transfer. With a balance transfer, you move your existing balance from one card, which typically has a higher interest rate, to a new card with a lower interest rate. 

Lenders offer balance transfer credit cards specifically for this purpose. Balance transfer cards often come with promotional APRs. For instance, a lender may offer 0% APR for the first 18 months. 

Let's say that you have a $5,000 balance on a card with 18% APR. You could refinance and move that to a balance transfer card with 0% APR for 18 months. 

This means that the lender will not charge you interest for the first 18 months, so long as you make your minimum monthly payments on time. The 0% APR buys you time to pay off your debt without having to worry about your lender collecting additional interest on the balance.  

Is a Credit Card

No, credit card refinancing is not the same as a mortgage refinance. When you hear the term "refinance," or "refi," the first thing that probably comes to mind is a homeowner looking for a new mortgage, either for lower interest rates or a new loan term. 

Conceptually, they are the same. A mortgage is a type of debt, often with either a 15-year or 30-year loan fixed term. A homeowner may look for lower monthly payments on this debt. By moving from a higher interest rate to a lower interest rate, a borrower can lower their mortgage payments and save money. 

However, there are far more complications when it comes to refinancing mortgage loans. Lenders look at the original loan amount, the number of years remaining on the current mortgage, the home's value, the home equity, and numerous other factors. The homeowner will also have to pay closing costs should they refi their current loan. 

Credit card refinancing, on the other hand, has nothing to do with real estate. The only similarity is that a borrower is looking to lower their interest payments. It’s also typically easier to access than a mortgage refinance. 

Who Is Eligible to Refinance Their Credit Card? 

Eligibility requirements for balance transfer cards typically vary from lender to lender. Lenders will look at your credit report and history to determine your eligibility. Factors that could eliminate your eligibility for a balance transfer card include: 

  • A history of missed monthly payments.

  • A bankruptcy filing. 

  • A low credit score, typically below 600. 

Many lenders reserve the best balance transfer cards for those with excellent credit, which is 670 or higher on the FICO credit scale. 

If your credit score is not this high, lenders may still deem you eligible for a credit card refinance, though you may not be eligible for the promotional APR. So, while you will be able to secure a lower interest rate, that rate may not be 0%. 

When you refinance credit card debt, the only thing you need to do is apply for a new credit card. In doing so, lenders will run a hard inquiry on your credit report. But that is the extent of determining eligibility. 

What Are the Pros and Cons of Refinancing? 

Credit card refinancing may seem straightforward, but it's not without its downsides. Below is a synopsis of the pros and cons of refinancing credit card debt. 

Pros of Refinancing 

There are many advantages of credit card refinancing. 

​Payment Consolidation 

If you're someone who struggles to manage monthly payments across multiple cards, refinancing could help. If you use a balance transfer card, you can transfer multiple balances to this new card. Instead of having to make three or four monthly payments, you only need to make one. It may be easier to make your minimum payment on time when there is only one required. 

Lower Interest Rates  

Credit card debt is the riskiest available because of high rates of compounding interest. When a lender charges you interest, it's added to your total balance. Your next interest charge is based on your balance, which means you're charged interest on top of interest. 

Transferring to a card with a lower interest rate could potentially save you hundreds — or even thousands — of dollars. 

Promotional Periods

The other perk of credit card refinancing is the promotional period offered by lenders. For instance, you may receive 0% APR for the first 18 months of ownership. This would put a freeze on interest charges. You still need to make your minimum monthly payments, but you have flexibility on when you pay it off.

For instance, in February you refinanced a $4,000 balance. You made minimum payments of $50 each month from February through November, paying off $500 total. Then in December, you receive a year-end bonus from your employer for $3,000. You put this toward your debt. Now, your remaining balance to pay off is $500. 

If your promotional period is 18 months, you have through July before your lender begins charging you interest. You would need to make monthly payments of $71.43 to pay the remaining balance of $500 before the promotional period ends.

​Cons of Refinancing 

The ability to transfer a balance and not be charged interest can be enticing. However, there are some downsides. 

Balance Transfer Fees 

Lenders will typically charge you between 3% and 5% of the total amount you're transferring. This is added to your total balance. 

In the example above, you transferred a balance of $4,000. If the lender charged a 5% balance transfer fee, you would owe an additional $200. You would need to pay this total balance during the promotional period if you wish to avoid interest. The balance transfer fee applies to all balances you transfer from all cards. 

Eligibility Requirements 

Balance transfer cards are typically reserved for those with good to excellent credit. There are some cards available for those with fair credit, but they often will not come with a promotional offer. You likely won't receive 0% APR, and your monthly payments may be higher depending on the balance you seek to transfer. 

Credit Checks 

If you seek to refinance with a balance transfer card, you will need to open a new credit card. As is the case with any new credit card, the lender will need to perform a hard inquiry on your credit report. Doing so will cause a short-term dip in your credit score. 

Should you make timely monthly payments, you can quickly recoup any points deducted from your credit score as the result of the inquiry. But, if you have some reason for needing your credit score to be as high as possible, like you're about to buy a home, you may want to hold off on the inquiry. 

What Other Options Are Available Besides Refinancing? 

If credit card refinancing is not right for you, there are other options available. One such option is a credit card payoff app, like Tally

Tally pays off your credit card debt using the debt avalanche method. Doing so pays off high-interest credit cards first. The sooner you’re debt free, the sooner you can start saving money for other financial goals. You'll need to have a good credit score to be eligible. But if you do, a credit card payoff app can streamline your payments and make handling debt easier.  

Clear Your Credit Card Debt Today 

If you would like to get out from under your credit card debt, one option to consider is refinancing. Credit card refinancing occurs when you move your balance on a high-interest card to a card with a lower interest rate. The most common form of credit card refinancing is a balance transfer card. 

There are pros and cons of refinancing. Balance transfer cards often come with promotional APRs, allowing you to pay off the debt without having to worry about interest. However, balance transfer cards are usually reserved for those with good or excellent credit. You are also charged a balance transfer fee upon moving the balance from one lender to the other.

If you prefer not to refinance, there are other options available. Tally automates your payments and pays off your debt in the most efficient way possible, saving you money in the long run.