A credit card is one of the best ways to pay for emergencies and offset bills. You don’t need to have money in that account to use it but it works when you need it to make payments. Card issuers allow holders to max out their cards and pay a minimum amount agreed when issuing them. In other words, you don’t have to offset your credit card at a specific time but must pay a certain minimum amount to continue using it.
That makes it easy and smooth for having a constant source of funds. However, the debt can become a problem over time, especially with the interest accumulating. How do you handle the repayment? That’s where a refinancing option becomes a lifesaver. Let’s guide you on refinancing your credit card debt with loans that have low-interest rates.
What Is Credit Card Debt Refinancing?
In simple terms, refinancing a credit card debt is taking a loan to pay off what you owe on your credit card. It can also mean transferring the debt balance on your current card to a new card with a lower or 0% annual percentage rate (APR) to cancel the old debt with the accumulated interest. Note that the 0% rate expires within a specific period and paying off the debt within that period is in your best interest.
As we explained above, using your credit card over time without paying off the accumulated debt causes the amount to increase. Remember that paying a minimum amount per month only takes care of a fraction of the amount used on the card. That means you still have a balance to pay.
For example, if your credit card usage for a month is $2,000 where you credited the account with only $500, that means you used $1,500 more than you deposited but you don’t have to pay everything when the bill comes for that month. You can pay a percentage of that amount, say, 50%. So the balance of $750 with interest carries over to the next month; since it’s become a loan, you owe interest.
If you continue using that card and pay only a minimum or percentage per month, not completing payment of what you owe, the debt keeps increasing. At some point, it becomes burdensome, especially as you have to add the accumulating interest.
You’ll eventually require help to pay off the debt and that’s how a refinancing loan can help you. You’re not alone in this issue; more than 50% of cardholders in the U.S. are also unable to pay off their credit card debts, with some owing more than $5,000.
You can take a new loan to pay the debt as long as the amount is enough to cover it. Any loan type can work but the interest rate has to be low and favorable. One of the major problems of credit card debts is that the interests are usually high. That’s part of the reason the debt is difficult to repay. But taking a new loan with much better repayment terms and interest eases the burden on your income.
We would like to point out that there isn’t much difference between a credit card debt refinancing and debt consolidation when it comes to definition. They both offer an avenue of paying off the debt on a credit card using various methods. The key difference lies in flexibility and variability.
Refinancing has no fixed monthly payments because the interest is variable, so what you pay this month may be different from what you pay the next. Also, there’s no fixed repayment date, so the loan can be repaid at any time. On the other hand, consolidation usually has a fixed monthly payment and a specific time to pay off the loan.
What to Consider
Before choosing to refinance your credit card debt, weigh all your options and think about its effect on your financial life in the long run. Also, consider what you need to apply and ensure you have everything in order. You can visit besterefinansiering.no/refinansiering-av-kredittkort/ to see the requirements for applying for this loan. While there are several loan options to pay off the debt, the one you choose will have the greatest impact on your finances.
Whether you start off with 0% interest on a new card or take a new loan to pay what you owe, the best way to ensure you get some relief from loans is to pay what you owe within the stipulated time. For example, transferring to a card with 0% APR has its benefits and downsides. You must pay off the debt within a stipulated time or go back to paying with interest.
Suppose the card says to pay the debt within 18 months and you fail. That means you must keep paying the debt with the added cost of interest. That may significantly increase your debt over time and affect your finances in the long run. To make the process easy and smooth, consider a few things when choosing a refinancing loan, such as the monthly payment amounts you can afford according to your income and an interest rate that is considerably lower than what you currently have.
You should also consider a loan with fees that don’t make much difference to the amount you’re repaying. These and a few other options should guide you to what works best for your debt payment.
Loans for Refinancing a Credit Card Debt
As mentioned, there are several loan types that help you repay the debts on your credit cards. What you choose depends on what works best for your situation but remember there’s no ”best method” as each loan has its perks and downsides. The best step is to evaluate your financial situation and decide which step to take.
1. Personal Loans
This is a type that allows you to borrow money as a lump sum and pay it back in installments. It is the most popular loan type because it’s quickly accessible and offers good amounts. A personal loan can be secured, where you access the loan with collateral, or unsecured, where you don’t need to present collateral.
You can combine different card payments into one to ease the process by making only one payment per month. The best part of using this loan is that borrowers of all credit scores can access it, although your credit score significantly impacts the interest rate.
The higher your score is, the lower the interest and vice versa. Failure to pay as agreed can lower your credit score even further. It helps to take only what will cover the debt without any extras, making it easy to repay it without tanking your credit score.
2. Home Equity Loans
A home equity is the value of the difference between your mortgage and the value of your house. Say your house is worth $100,000 and your mortgage is $25,000. The equity on that house is $75,000 and you can take a loan based on that.
Like a personal loan, a home equity loan comes as a lump sum but a lender won’t give you all of the value as a loan. Instead, they usually peg it at about 80% of the equity value. It can be a substantial amount if the equity is high; you may not need all the money to pay off the debt.
If this method fits well with your finances and you want to take that route, consider taking the loan to ease the strain on your income. You can access it through an online lender or a bank; the process is pretty thorough and requires a credit check. The downside is that it works almost the same as a personal loan when it comes to interest. The higher your credit score, the lower the interest and the lower the score, the higher the interest. There’s also the risk of foreclosure if you can’t pay back the loan, which means losing the best asset in your possession and the place you live.
1. Balance Transfer Card
We talked about transferring a credit card debt balance to a new card with 0% APR or interest. That is a balance transfer card. If your credit card has high interest, a balance transfer card is one of the best ways to pay off what you owe because you have no interest to worry about, only the principal amount.
You can easily apply for this card online but must have a credit score of 680 or higher. It’s a viable option if you meet the eligibility criteria and don’t have a high amount to repay. However, some of these cards have fees that can be as high as 5% of the amount you transferred to them and a limited time frame for the 0% interest offer.
Check your debt to see if you can repay it within that limited time. Do what makes the best financial sense instead of reverting to the old amount with interest and added fees, increasing the total repayment amount.
4. Title Loans
A title loan is a short-term loan where you present your car as collateral. As a secure loan, you may get good terms and lower interest rates than an unsecured loan, depending on the lender.
If your car is in good condition and debt-free, using it to take a refinancing loan is ideal. But you must find a lender willing to take the car as collateral and give you the amount required to cover the loan. They should also give ample time to repay it because title loans must be repaid within a month or a little more.
There’s a risk of losing the car so it works if the amount is something you can easily repay. Some cars will bring better offers than others but the bottom line is to ensure it works well. Click here to learn more about them.
Conclusion
Refinancing your credit card debt is a way to ease the financial burden on your income and pay lower for what you owe. Several loan types, like personal loans and home equity loans, work well in refinancing. But before going that route, consider other options, such as reducing your expenses to have more money per month so you can increase your monthly payments.
Having a high credit score also helps in getting favorable loans with low interests. Make payments on time to avoid damaging your credit score and don’t take more loans until you repay what you owe in a timely manner.
