Should You Refinance Your Credit Card Debt?

The average credit card interest rate remains consistently around 16%. Not only are these interest rates high, but they’re difficult to pay off because the interest compounds. This means that the accumulated interest is added to your balance at the end of the month, and the next month, you’re charged interest on this new total amount. 

Continually dealing with high interest rates can not only be frustrating, but it can also complicate your personal finances. One option you have to get out of high-interest credit card debt is to refinance. Refinancing occurs when you move your existing balances to a new lender who offers a lower interest rate. 

In this article, we’re here to answer the question, “Should you refinance credit card debt?” We’ll outline what refinancing is and how it could impact your financial situation. 

By the end of this article, you should have a much better understanding of whether refinancing is an option to help pay down the balances you have on your credit card accounts. 

What is refinancing? 

Refinancing is a tool that allows you to get the best rate possible on your credit card. Essentially, refinancing occurs when you move your current credit card account and balances from your existing lender to a new lender. The purpose of doing so is to secure a lower interest rate, therefore shrinking your total repayment value. 

Balance transfer credit cards are one type of financial product that falls under the category of refinancing. With a balance transfer card, you move your current balances onto a card with a lower APR, typically around 0% depending on the promo offer. Because you moved your balances to an account with a lower interest rate, you technically refinanced. 

Should you refinance

To decide if you should refinance credit card debt, you should consider your personal financial situation. While it may make sense upfront to lower your interest rate, there are some ramifications you need to be aware of. Below are some of the pros and cons to consider when determining whether you should refinance credit card debt. 

Pro: Lower interest rates

Perhaps the most obvious benefit of refinancing credit card debt is that you pay less in interest. As mentioned, credit card interest compounds and piles on more debt. The opportunity to pay off your balances with a lower interest rate could potentially save you hundreds, if not thousands, of dollars. 

Pro: Consolidated payments 

You can refinance multiple credit card debts at once, consolidating them into one account. Again, a balance transfer card is a perfect example of this. 

This strategy can be beneficial if you are a borrower who struggles to make monthly payments on time. You could be missing monthly payments either because you forget the due date or can’t make the minimum payment. Doing so can cost you even more in late fees. Penalties may also kick in and your lender may charge a higher interest rate. 

So, if you struggle to budget and make your minimum monthly payments, credit card refinancing could be a useful tool. 

Pro: Introductory periods 

Lenders may also offer introductory periods or promo periods when you refinance. This essentially means that they extend a particularly low interest rate for a defined period of time. 

For instance, when you refinance using a balance transfer card, your lender may offer 0% APR for the first 18 months. During this time, you can pay down your balance without worrying about interest.  

However, be sure to read the fine print and the disclaimer. Many credit card companies will void the introductory offer if you miss just one minimum payment. 

Con: Eligibility requirements 

Your lender may not consider you for a refinance unless you have a good or excellent credit score. For reference, a good FICO score is 670 or higher. A good VantageScore is at least 700. Though you may be able to refinance with fair credit, you likely won’t be able to do so if you have bad credit. 

If you have less than good credit but still manage to qualify, there may be stipulations. You may not receive the best interest rates, and your monthly payments may be higher. 

Con: Balance transfer fees 

Many lenders will charge a balance transfer fee when you move an existing balance from an old account to a new account. Though it depends on the credit card, the average fee is between 3% and 5%. 

For instance, let’s say that you transfer a $5,000 balance, and the transfer fee is 4%. The fee would equal $200. This fee would be added to your account balance, which would now be $5,200. 

The money you save on interest is likely greater than the cost of the balance transfer fee. But this may not necessarily be the case, as it ultimately depends on your financial situation. 

Con: Credit checks

When you refinance, your new lender will need to perform a credit check during the application process. Doing so entails pulling your credit history. This hard inquiry will subsequently show up on your credit report, which may then lower your credit score. 

If you make timely monthly payments and practice good financial habits, your credit score should quickly rebound. This is especially the case if you start paying off debt, as your available credit will increase and your credit utilization rate will decrease. 

Are there other methods of refinancing? 

Technically, a credit card refinance occurs any time you lower your interest rate. This is a broad term that encompasses many options. 

For instance, you can call your lender directly and negotiate your interest rate. By lowering your APR, you’ll have refinanced and saved yourself money on interest. 

Another form of refinancing is with a debt consolidation loan. This is an unsecured personal loan that you take out to pay down your existing credit card balances. The loan typically has a lower interest rate than your credit card. 

Debt consolidation loans could allow you to combine multiple unsecured debts, such as those from credit cards and medical bills. However, the lender will still need to perform a credit check. There are also fees, known as origination fees. Be sure to study debt consolidation loans when comparing this to a balance transfer or credit card refinance. 

One last form of refinancing is using a credit card payoff app like Tally. Tally’s line of credit1 can help qualifying users pay down their higher-interest credit card debt.

Determine whether credit card refinancing is right for you 

If you have the opportunity to lower your credit card interest rate, you should consider it. Because credit card interest compounds, it can make it difficult to pay down your balances in full. 

Refinancing is a broad term that refers to lowering your credit card interest rate. Though balance transfer cards are the most well-known way of doing so, you can also look into other options like a debt consolidation loan or a credit card payoff app like Tally.

The most important thing to keep in mind, no matter which option you choose, is how it will impact your financial situation. Doing your homework and understanding your personal finances will put you in the best position for success.

^{1To 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% – 29.99% per year, and will be based on your credit history. The APR will vary with the market based on the Prime Rate.}