If you’re like most people, you’ve probably gotten credit card offers in the mail. Some of those offers come with a 0% introductory APR. Zero-interest credit is always an advantage, but you can use it to refinance other debt, too.
What is credit card refinancing? In this article, we’ll take a closer look at what credit card refinancing means and how to decide whether it’s the right option for you.
What Is Credit Card Refinancing?
What does credit card refinancing mean? Credit card refinancing involves transferring existing credit card debt to a lower-interest option. Common examples include:
- A balance transfer card
- A personal loan
- A credit card refinance loan
Many people who refinance credit cards transfer debt to a credit card with a 0% introductory APR. Once they transfer the debt, they pay it off before the promotional period ends. Most of these promotional periods last from 12 to 18 months.
How Does Credit Card Refinancing Work Compared to Debt Consolidation?
Many people use the terms “refinancing” and “consolidation” interchangeably. However, the credit card refinancing meaning is slightly different from that of debt consolidation.
Credit Card Refinancing
How does a credit card refinance work? It usually doesn’t involve combining multiple debts. Instead, you transfer a debt to a new card with a lower interest rate. Alternatively, you may take out a loan and use it to pay off the credit card.
However, before you rush to transfer high-interest debt to a new credit card, there are a few things you should consider:
- The new card should have a 0% promotional APR for balance transfers, not just purchases.
- Most cards have a balance transfer fee of 3%–5% of the transferred balance.
- Most companies won’t let you make a balance transfer between two cards from the same issuer.
This method of dealing with debt only makes sense if you can pay off the transferred debt before the promotional interest rate expires. Otherwise, you’ll end up with high-interest debt that’s just on another credit card.
Debt Consolidation
Debt consolidation is when you combine multiple credit cards (or other debts) into one. Usually, you combine them using a loan with a lower interest rate. Here’s how it usually works:
- You find and apply for a loan.
- You’re approved, and the funds are deposited into your bank account.
- You use the money to pay off your credit cards.
- You pay off the loan.
If you secure a consolidation loan with a low enough interest rate, you could save a significant amount of money. Consolidation can make paying off debt simpler. Instead of juggling multiple payments, you just have to make your loan payment each month.
Should I Do Debt Consolidation or Credit Card Refinancing?
When is it a good idea to refinance credit card debt? That depends on your goals and circumstances. Here’s a look at when it makes sense to refinance debt and when it makes sense to consolidate it.
When to Consider Credit Card Refinancing
Credit card refinancing may be a viable option if:
- You have a relatively small amount of debt.
- You think you can pay off the debt by the end of the promotional period.
- You have good credit (usually required to qualify for a balance transfer card).
Credit card refinancing isn’t the best choice in every scenario, but it’s worth considering if you need a short-term repayment plan.
When to Consider Debt Consolidation
Here’s when debt consolidation might be the better choice:
- You have a larger amount of debt and need a long-term repayment plan.
- You want to combine multiple debts.
- You have at least fair to good credit.
Debt consolidation only makes sense if the loan you qualify for has a lower interest rate than the debts you’re trying to consolidate. Otherwise, you may end up paying more over the long term.
Can You Refinance a Credit Card or Credit Card Debt?
Yes. You can refinance a credit card by transferring the balance to a zero-interest or low-interest card instead. If you want to refinance several credit cards, consolidation might be a better option.
Does Refinancing Mean You Pay More?
Usually, no. If you can transfer debt to a credit card with a promotional 0% interest rate and pay it off before the rate expires, you could save hundreds in interest. However, if you were to transfer debt from a credit card to a card with a higher interest rate, you could end up paying more.
What Is the Best Way to Refinance Credit Card Debt?
What is credit card refinancing? Every year, countless people feel trapped by high-interest credit card debt. By researching credit card refinancing and other options, you’re taking meaningful steps to pull yourself out of that trap, and that’s admirable.
