So, what is credit card refinancing? Simply put, it's the process of taking out a new loan to pay off your existing credit card debt. This new loan will typically have a lower interest rate than your current debt, which can save you money in the long run.
Most cardholders must pay their balance in full each month, and they owe an average of $5,000. However, you wouldn't also want to make things worse through the compounding interest rates, so one of the solutions you might be looking for is refinancing.
Taking out a new loan to pay off one or more existing loans is beneficial for people who are qualified to lower rates. The new loan is typically more affordable, and the borrower's monthly payments tend to be more comfortable.
When you refinance your credit cards, you will need to close your old accounts and open a new one with the lender that is providing the refinanced loan. This can impact your score, so it's important to weigh the pros and cons of refinancing before deciding.
Some things to consider before refinancing your credit cards:
- How much debt do you have?
- What is the interest rate on your current loan?
- What is the interest rate on the new debt?
- How long will it take you to pay off the new rate?
- What are the fees associated with the new transaction?
- What is your current rating or score?
Refinancing your credit cards can save you money on interest payments, but it's important to consider all the factors involved before making a decision. If you have questions, speak with a financial advisor to get expert advice.
More about the Process
The refinancing can come from a bank, credit union, or private lending company. The goal is to pay for a lower overall sum and get out of debt faster. Most consolidation methods generally involve balance transfer cards or borrowing against a retirement fund. The option that you will choose will generally depend on your current financial situation and goals.
Consolidation vs. Refinancing
There's a difference between refinancing and consolidation. However, both of them aim to reduce your debts in the long term. With consolidation, you have a chance to obtain a loan that's at a lower interest rate. You can then use the funds to pay off some of the balances on your credit card.
However, consolidation will mean putting one of your assets on the line, like a property or a vehicle. They generally require collateral, but you could always find companies for kredittkort refinansiering that do not need assets from borrowers. As long as you have an excellent credit standing and you're on top of your finances, then everything should be fine.
With the debt consolidation loan, the annual percentage rate is lower, and you'll have a fixed monthly payment over time. Some cards will have variable interest rates, so it's not surprising that many people are looking for other options. Most financiers can deposit the loan proceeds in the borrower's bank account within seven business days, making it more convenient for others who want to repay their other bills faster and without any penalties.
What about Balance Transfer Cards?
You might have received a flashy balance transfer card in the mail where the bank or a company is promising you 0% interest rates. These are popular with introductory offers, and if you're one of the recipients, you still need to be qualified to refinance your other loans. You still have to complete an application process, and you should have a FICO score of 690 or higher. Others who need to meet the required score can slowly improve their financial situation or try a different method to pay off what they owe.
How to Improve your Score?
Pay Each of the Bills On Time
While this might seem simple advice, most people cannot pay their bills within their due dates. Instead, they choose to make additional purchases which can lead to trouble down the road. One of the factors that the scoring model considers is the payment history. If you're often consistent and pay everything in full, you can expect your score to be higher than average.
Payment for Phone Bills is Counted
If you're constantly paying your telecommunications bill on time and your utilities, you will also get rewarded with a higher score. Many companies have programs that will let you boost your score with them as long as you remain a responsible borrower. If you are consistent with your utility and phone payments, this can get added to your file and boost your score in the process.
Unused Credit Cards Should Remain Open
One of the most important factors being considered when borrowing is your credit utilization ratio. This is why some borrowers keep their other accounts open even if they don't need to pay anything. However, this can come at a disadvantage since you might be required to pay fees annually even if you're not using them. You can read more about the annual fees when you click this site here.
Refinancing and Its Effect on your Score
Consolidating your debts can lower your score in the short term, but it can be beneficial in the future, especially if you can pay your monthly dues on time. The checking and application process will hurt your credit score by a few points, and the cards' average age is also considered. The higher the average age, the higher your score will be. As a result, when you add a new one, you can also expect your score to dip.
The process of refinancing will also enable the financiers to make a hard inquiry on your financial report. This will lower your score but only by a few points. For those who will make inquiries within the 14-to-45-day mark, the bureau will generally treat this as a single inquiry but if this is going to be consistent over a few months with multiple financiers inquiring about your situation, then expect a significant impact on your score. However, regardless of your choice, know that debt accumulation and late payments will affect you negatively, so always get your finances in order.
Is this the Right Option For You?
As mentioned, you have many options when you decide to refinance. You can use consumer loans to pay off your current card balances or apply for revolving credit. These fixed payments and longer terms will give you breathing room if you want to get your finances in order. However, they have pros and cons that you need to know about.
Personal Loan
With consumer debts, this can be a good option for people who have a FICO score of 670 or more. The lower scores will mean that there might be a need to put collateral on the line, which will negatively impact one's credit score. It's always a good idea to pay your monthly dues on time before considering personal loans for your consolidation needs. Some of the pros and cons are the following:
Pros
- This will have an end date where you will know when you'll be able to finish paying everything
- Combine various cards into one
- You're not necessarily required to have a higher score
- This does not need any collateral since it is unsecured
- Most of the payments are going directly out of your earnings every month
Cons
- Higher fees, interest rates, and credit score
- There can be prepayment penalties and early repayment fees that will cost more
- You're still essentially increasing your debt in the process
Balance Transfer Options
These have special rates of 0% APR for a specific period, and all payments can go towards your balance. Some of the advantages and disadvantages are the following:
Pros
- 0% introductory rate
- Apply online and get accepted easily
Cons
- A high score is needed before qualifying
- Fees can increase drastically after the introductory offer expires
- Limited time only on 0% interest rates
Alternatives to Consider
If you're looking to get out of debt, there are a few alternatives to credit card refinancing that you can consider. One option is to transfer your balance to a 0% APR credit card. This will allow you to save on interest and pay off your debt more quickly. Another option is to take out a personal loan from a bank or credit union.
This can be a good option if you have good credit and can get a low-interest rate. You can also consider using a debt management plan through a nonprofit credit counseling agency. This will help you get out of debt in 3-5 years and improve your score.
Refinancing your credit card debt can be a great way to save money on interest and pay off your debt faster. By shopping around for the best rates and terms, you can find a refinance option that works for you. Be sure to compare multiple offers before deciding, and remember to factor in any fees associated with refinancing.
