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Should You Refinance Your Credit Card Debt?

Personal Loans vs Balance Transfer Cards

Ready to get serious about paying down your consumer debt? Refinancing options may help you get organized and save you money in interest. There are a couple of different tools you can use to refinance your credit card debt. A personal loan with a lower interest rate than your credit cards can help you save money. You can use it to pay off all or part of your balances and consolidate multiple payments into a single payment which you can then “set and forget.”

Another helpful tool you can use to save money on credit card interest is a low/zero interest balance transfer card. A balance transfer is when you move all or some of your credit card balance from one card to another. This can save you money if you are able to make a significant dent in your balance during the low interest period. The best kind of balance transfer card is the 0% interest transfer card with no transfer fee.

Refinance Your Credit Card Debt With a Personal Loan

If you have a decent FICO credit score, you may be able to take out a personal loan, pay off your credit card balances, and then make one payment a month to pay off your personal loan in installments rather than making several payments to your credit card companies. Personal loans are usually offered with a 1-5 year monthly payment plan.

Related content:  How to Get The Best Personal Loan

Pros

  • May be able to refinance at a lower interest rate and save money over time.
  • Can increase your credit utilization score which is 30% of your FICO credit score.
  • May increase your credit mix score which is 10% of your FICO credit score.
  • May make it easier to stay on task with a single payment per month instead of several.

Cons

  • Freeing up credit cards with a personal loan can get you into serious trouble if you are not diligent about leaving the cards alone. Only take this route if you are completely committed to using the loan as a tool to get out of consumer debt.
  • Your monthly installment payment on your personal loan may be higher than the minimum payment amount on your current credit cards. Make sure that you’ll be able to cover it each month. (Keep in mind, however, that in order to pay off your consumer debt you will have to throw more at that debt than minimum payments anyway.)

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Key points

A personal loan will only save you money if you are able to get a lower interest rate than you already have on your credit cards. For example, if the APR on your credit card is 17% and you are offered a personal loan at 19%, it does not make sense to refinance your card. You will end up paying in more in interest.

The lower your FICO credit score is, the higher the interest rate you will be charged for a personal loan. Before you start shopping for a personal loan, make sure that your FICO credit score is high enough to qualify for an interest rate that will help you.

Related content:  Know Your FICO: A Guide to Understanding Your Credit Score

Refinance Your Credit Card Debt With a Balance Transfer Card

Credit card companies use balance transfer cards with zero or low interest rates as a marketing incentive to try and get new customers. But watch out. Credit card companies are hoping you don’t pay off your debt during that zero/low interest introductory time period. Why? They want you to pay that high interest rate when the introductory time period runs out. The introductory rate can run from 6 to 21 months depending on the card. If you use these, make sure you are really aggressive with your payments to take advantage of the zero/low interest rate window.

Pros

  • Can save a lot on interest if you pay them down quickly.
  • Can increase your credit utilization score which is 30% of your FICO credit score.

Cons

  • If you cannot pay down the card before the higher interest rate kicks in, you will be on the hook for that higher interest rate.
  • As with personal loans, freeing up credit cards with more credit cards can get you into serious trouble if you are not diligent about leaving the cards alone. Only take this route if you are completely committed to using the card as a tool to get out of consumer debt.
  • Some balance transfer cards charge a 3-5% fee to transfer the balance. For example, if you transfer $5,000 to a card that charges a 3% fee, an additional  $150 would be added to your balance.

Key points

  • A balance transfer card will only save you money if you can take advantage of the low interest period.
  • Applying for multiple cards in a short period of time while card shopping can temporarily ding your credit, as the card companies do a hard credit inquiry upon your application.
  • A 0% interest card with no transfer fee can be a great tool, but keep in mind that you may not be able to refinance all of your cards.
  • Be sure to create a repayment plan that targets your highest interest card first.

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Which Option Should You Choose?

Before deciding whether you should refinance your credit card debt with either a loan or a card, consider your personal circumstances. You will want to look at your FICO score, how many card balances you have, and your total amount of debt. Your FICO score may not be high enough to get a personal loan with a lower interest rate than you are paying on your cards. Or you may not qualify for the better balance transfer cards. You may not be able to transfer all of your debt to balance transfer cards, or you may not be able to get a personal loan high enough to refinance all of your cards.

The Bottom Line

It’s a good idea to sit down with your statements to get the big picture of your situation before you consider refinancing. Note the interest you are currently paying on each card, the balance of each card, and the total balance of your debt. Then come up with a repayment plan that has a long term goal of being debt free forever and commit to stick to that plan! The biggest and most common mistake you can make when you refinance your credit card debt is to use a personal loan or balance transfer card for a bit a relief, and then rack up debt on your cards again. It happens more often than you think and can get you in serious trouble. Get ahead of the  curve and take control of your consumer debt.

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