The average credit cardholder living within America carries a credit card debt of over $5000 and only pays the minimum payment. According to financial consultants, the aim is to repay the entire balance each month to avoid the high interest that credit cards carry. Read this article to find answers on why you should repay credit card debt.
When you carry a balance, interest accrues, and the debt grows, weakening your credit standing. Credit scores depend partly on the amount of debt you carry in comparison to your income or “DTI” / Debt-to-income ratio.
The lower this percentage, the less it will impact the credit rating. If you consolidate this debt down to one lower interest payment, you can repay the balance faster, helping to diminish this ratio.
There’s not one financial solution to suit every person who hopes to rid themselves of these high-interest debts. Still, there are many credit card refinansiering (refinancing) solutions; click here to learn more.
The aim is to achieve a lower interest rate for the accumulated debt and combine these into a single monthly repayment instalment. Let’s look at a few ways you can do this.
What Is Credit Card Refinancing?
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Varied forms of credit card refinancing can assist in bringing the high interest on these cards to a lower rate, even combining them into a single monthly repayment. Some standard options include obtaining a personal loan, balance transfer credit card, retirement account loan, or home equity loan.
Which solution you choose will depend on your specific credit profile and financial circumstances. The first thing to consider is whether you will refinance or do a consolidation.
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Debt consolidation
With debt consolidation, a personal loan is obtained to pay off the high-interest debt. Typically, these loans have a lower interest rate than the combination of interest rates on the remaining credit cards.
A borrower can also get these unsecured, which doesn’t require a personal property to secure the funds or collateral. These solutions are stringently dependent on your credit profile.
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Credit card refinancing
When you obtain a balance transfer credit card, the high-interest card balances can be transferred to this card. These usually have an introductory APR of 0% for a limited period of roughly 12 months, sometimes longer.
The catch is the balance needs to be payable within that period before the rate will rise to what is standard for a credit card and what you’re currently trying to rid yourself of.
Does Refinancing Credit Card Debt Work Adversely Against Your Credit Score
In the short term, you can see an impact on your credit score from either refinancing or consolidation but looking at it in the long term and considering your payment behavior; it can actually be of benefit.
Applying for a new credit card will typically lower a credit rating a couple of points. The age of your accounts is a factor in the score. Your score will be higher based on the overall average, meaning when you add new, the average diminishes, and the score decreases.
When you formally apply for a personal loan, the lender will do a hard credit pull on the report lowering the score by a couple of points. If you happen to be shopping among varied providers, this will appear on the report in a short period.
If you can keep it within a “14-45 daytime frame,” the bureaus will count these as one inquiry. Those that spread beyond that can have a more significant impact. Still, the score will start to increase once the existing balance disappears.
The score will be negatively impacted when repayments are delayed or missed altogether, or additional debt is added to monthly obligations.
How Can Credit Card Debt Be Refinanced
Varied methods for refinancing credit card debt are available, including balance transfer cards, considered a “revolving credit” but with a considerably lower rate. Other options like a personal loan mean to pay the balance off, again, with a much lower fixed interest rate and fixed repayment installments for a set term.
There are advantages and downsides to the financial solutions. The one you choose should work the best for your particular circumstances and serve your purposes ideally, not to mention saving you money. Go here https://www.forbes.com/advisor/credit-cares/how-much-credit-card-debt-is-too-much/ for details on how much credit card debt is too much.
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Refinancing with a personal loan to pay off credit card debt
Personal loans depend stringently on the borrower’s credit profile and financial circumstances. The suggestion is that the credit score needs to be no less than “670.” If it falls below that level, the lender will assign the loan with a higher interest and also attach fees to hedge the risk they’re burdened with since these loans are unsecured.
That means the borrower is not responsible for putting up a property, securing the funds, or using collateral. There’s little risk to the client. It all falls to the lender. Members who belong to a credit union or those with a valued relationship with a traditional bank might fare better since their reputation and history are known.
In an effort to minimize the adversity to the credit rating, it’s wise only to borrow the amount needed to pay the balance of the existing debt and then repay those monthly installments promptly. What are the pros and cons of this particular solution:
Pros:
- Set up autopay to avoid missed payments
- Unsecured; requires no collateral
- Credit score requirement is reasonable
- Has a definitive term
- Consolidate multiple high-interest debts into one low-interest payment
Cons:
- Risk of continuing to accrue debt with credit cards
- Fees can raise the cost of the loan
- Low credit score increases the interest rate and adds fees
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Refinancing with a balance transfer credit card to pay off credit card debt
Balance transfer cards offer an introductory rate of 0%. The idea is to transfer balances from the high-interest cards to this one. Without interest, the entire payment made on the card each month will diminish the overall balance.
The catch is that the introductory interest rate is only available for a specific limited “introductory time frame.” That usually lasts roughly 12 months, and some cards come with fees attached.
It can include as much as a 5% charge of the transferred amount. You’ll need to consider this amount to see if it makes sense to take this financial solution. Usually, in order to qualify, credit scores need to be no less than “680.”
Another thing to factor in is the fact that if you aren’t able to pay the balances that you transfer to the card within the introductory time, the 0% assigned to the card will rise to what is a typical credit card interest rate, usually exceptionally high. All the interest that should have been accruing to this point will be attached.
If you choose this method, it’s wise only to transfer an amount you know you can get paid within that beginning period where the interest rate will stay at 0%. What are the pros and cons of this financial solution? Let’s learn.
Pros:
- Online applications are readily available and user-friendly
- Transfer high-interest cards to a 0% interest balance transfer card
Cons:
- Higher credit score to qualify
- The attached fees make the option expensive
- The 0% interest balance transfer rate is for a limited time
How To Decide Which Option To Refinance Your Credit Card Debt
There are a multitude of other options to use when considering a refinance to rid yourself of high-interest credit card debt. You can choose to borrow from a retirement fund or take a home equity loan.
When looking at options, the thing to consider, especially with these two, is what would be the repercussions if something were to happen, and you couldn’t repay the balances.
Taking away from a retirement fund means you’re diminishing your future wealth. It is deemed exceptionally risky when you don’t know what that future might hold. A home equity loan puts your home at risk. Again, that’s a risk not many people are willing to take. If you can’t pay, the lender can take your home.
The two options discussed are not without risk, but these risks are to your financial situation and not your overall well-being. It’s one way to try to narrow down challenging financial decisions. What will the long-term impact be? The solution should not put you in a worse circumstance.
Final Thought
High-interest credit cards can be overwhelming; eventually, another financial solution becomes necessary to try to break free of it. The priority is establishing a budget to determine a monthly payment that will fit comfortably.
From that point, you can decide whether you can feasibly pay a balance within a 12-month balance transfer credit card introductory period or if it would be better to stick with a fixed-term personal loan with a set repayment. Whichever decision you make, a priority is to lock away the credit cards to avoid accruing additional debt worsening your circumstances.
