Thinking About Refinancing Your Credit Card? Ask These Crucial Questions First

If you have credit card debt, you’re not alone. A recent poll suggests that roughly 47% of Americans have credit card debt — and that the COVID-19 pandemic tacked on additional credit card debt for 23% of survey participants. 

Excessive credit card debt can feel overwhelming, but remember that you have options. Credit card refinancing is a great option in many cases, as it can help you save money on interest and potentially allow you to pay off debt quicker.

Before you jump in, it’s important to understand what you’re getting into. Here are six key questions to ask when thinking about refinancing. 

How does credit card refinancing work?

Credit card refinancing involves transferring debt from one credit card to another or from one lender to another. The basic principle with refinancing is to find an interest rate that is lower than what you are currently paying to save money on interest.

In the case of transferring a credit card balance from one card to another, you may be able to take advantage of a credit card with a special introductory rate. Some credit cards even offer 0% introductory rates for the first 6 to 24 months.

Not everyone will qualify for a credit card with a 0% introductory rate, and the short timelines of these offers can be limiting. 

Transferring to a standard low-interest credit card or a personal loan may be easier, but the savings are often lower. Even so, transferring debt from a card with a 25% APR to a personal loan with a 15% APR, for example, can still save a substantial amount of money.

How much can I save by refinancing a credit card?

The amount you save when refinancing a credit card will vary based on these factors:

• The amount of debt you are refinancing

• Your credit score and creditworthiness 

• The current interest rate you are paying

• The credit cards that are available to you and their introductory APRs

• The personal loan terms and APRs that are available to you

For example, let’s say you have $10,000 of credit card debt on a card that has an APR (annual percentage rate, or interest rate) of 25%. You could potentially transfer that debt to a card with a 0% introductory interest rate. Depending on the card, the introductory rate may last for 6 months to 24 months. 

In this scenario, refinancing could save you around $2,500 per year, or $208 per month, for the term of the introductory-APR offer. These savings may be reduced by fees and other expenses. This is a simplified calculation, and your results will depend on the factors discussed above. The only catch is paying off the transfer balance before the introductory-APR offer expires. If you don’t, you may end up in the same spot financially, or worse, than you were before making the transfer.   

You can also use this credit card debt payoff calculator to learn how much you could save by using Tally. 

How much will it cost to refinance a credit card?

Refinancing a credit card will involve some costs. Typically, there will be an initial fee to transfer the balance, and there may be other ongoing fees or expenses. You will also pay interest on the balance.

Costs can vary. If you transfer to another credit card, you will pay a balance transfer fee. This is typically 3% to 5% of the amount transferred and is charged up front or added to your balance. 

For example, if you transfer $5,000 to a new credit card, you will likely need to pay between $150 and $250 to transfer the balance. 

If you apply for a personal loan to pay off credit card debt (essentially transferring the debt to the personal loan), you will pay loan origination fees, typically 1% to 10% of the loan amount. The percentage will depend on your credit score and the financial institution you use. 

Do I have a debt payoff strategy?

Before you refinance, consider your financial goals, current debt levels and your debt payoff strategy. Consider how refinancing will change these plans. It’s vital to have a detailed plan to pay off your debts in a timely manner in a way that reduces interest expenses as much as possible.

Credit card refinancing can positively affect debt payoff strategies by providing some breathing room in the form of reduced interest rates. It can potentially save you hundreds, if not thousands, of dollars. 

For faster results, use the savings from refinancing to pay off debts. This can create a snowball effect by helping motivate you to improve your financial standing and finally get out of debt. 

What happens when you refinance?

If you refinance by transferring the debt to another credit card, the debt is simply transferred to the new card. Your credit card company handles the logistics of this, but essentially, the new bank pays off the debt for you and transfers the debt to the new credit card. 

If you refinance via a personal loan, you may need to be more directly involved. You will need to apply for a personal loan and follow all the requirements set out by the financial institution. 

If approved, personal loans are typically deposited into your checking account. From there, you can pay off your credit card debt by calling in or making an online bill payment. This will eliminate the credit card debt and you will simply need to make regular payments on the new personal loan. 

Is it smart to refinance?

If refinancing a credit card can save you money on interest, then yes, it is generally worthwhile and a smart financial decision.  Before you refinance, however, it’s important to calculate how much you can actually save. Consider all fees — balance transfer fee, loan origination fee, etc. — as well as the difference in interest rates between what you currently pay and what you could pay by refinancing. 

Looking to get out of debt? Check out Tally, a tool to manage your credit cards, create a custom payoff plan and save both time and money.