A credit card is an excellent financial tool that you can use for shopping, earning rewards, and making transactions. It also provides a great source of cash and can help you build a good credit score. But sometimes, life might come at you fast. You might become stuck with different credit cards with varying balances. Being in debt is not a good experience, but there is a way out.
One of the best ways to manage and lower this debt is to refinance the loan. With this refinancing option, you will transfer the balance of your current credit card onto a new one with a lower interest rate. There are different methods that you can use to refinance this card and you can find some of them in this post.
This article will also discuss what to consider before refinancing a credit card, how refinancing negatively affects your credit score, some of its benefits, and how you can improve this score.
Ways to Refinance a Credit Card
The following are some ways to do this:
This is a popular method used by some borrowers. If you have a high interest rate and balance, you can transfer your debt to a new card with a lower introductory rate. In some cases, the introductory rate is as low as 0%, and it lasts for about 12 to 24 months.
The length of this promotional rate will give you enough time to offset your debt without worrying about interest rate expenses from your lender. Although most balance transfer cards charge a 3 to 5% balance transfer fee, it is usually less than the normal interest you were paying on your former credit card.
A good way to get this balance transfer card is to have an excellent credit score, so it is vital to maintain a perfect credit report.
Another way to refinance is through debt consolidation. There are several means to consolidation. Here are some of them:
This is a common way to do this. You can apply for a loan at your bank or a credit union. You have the option of completing the application online or physically. The interest rate of the loan and its terms are usually flexible, so you can set a budget to fully repay the debt.
Debt Consolidation Programs
If you have more than one credit card, you will like these programs. These programs allow you to combine your credit card balance into one single payment. This is quite different from when you take a loan to pay off your existing balance. In this consolidation method, your existing debts remain, but it is quite manageable and you will only pay to the program which would then pay off your lenders.
The advantage of these programs is that your monthly single payment will be less than what is obtainable if you were to make payments to the lenders individually. The programs will also work with your lenders to reduce the interest rate and also remove late fees. Choosing a good debt consolidation program is necessary. Ensure that you choose one that is not just reputable but has offers that suit your needs.
Although it is not ideal to consolidate your debt with a retirement account, it may be a good option for some people. Taking a 401(k) loan is a good way to receive a lower interest rate than personal loans offer. This can greatly improve your credit score profile as the loans do not need a profile check. A downside of this is that you reduce your retirement savings.
Second Mortgage or Home Equity Line of Credit (HELOC)
Another debt consolidation method is to take a second mortgage or use your property to pay off your credit card balance. You can do this by taking a second mortgage or using something called a Home Equity Line of Credit (HELOC) to pay off the debts. A home equity line of credit (HELOC) allows you to use your house as collateral for the debt.
Since you are offering an asset or collateral for the loan, the interest rate is usually lower than other methods. Having such a low rate allows you to pay off the credit card balance promptly.
P2P or peer-to-peer lending is another means of getting a consolidation loan. Peer-to-peer brings together people who want a loan and people who will offer that to them. While this comes with certain risks, it is still a good way to access funds for consolidation.
Equity in Vehicles
Like your home, personal vehicles are a good way to pay off your lenders. You can take a loan with your vehicle as collateral for this. Because you are offering an asset, the interest rate here is quite low and the repayment terms are longer. You can easily pay off the credit card balance and have enough time to repay the new debt.
Technology is making things easier so it is not surprising to see some online applications that can combine all your credit card payments into a single payment. Some of these platforms offer a personal line of credit that you can use to refinance your card debt.
What to Consider Before Refinancing Your Credit Card
Although refinancing is always a good thing to do, it is still wise to keep certain things in mind before doing so. Here are some of these considerations:
Know the Terms and Conditions of the Method You Choose
Whether you decide to go for a debt consolidation loan or get a balance transfer card, there are always terms and conditions to read through. Some loans and balance transfer card comes with charges. You need to make sure that these charges are not higher than your current card fee. You want a loan with better terms and interest rate, so read through the fine print of the new loan before agreeing to anything.
The Debt Amount Remains the Same
Refinancing does not automatically change your debt amount. Instead, it allows you to find a way to pay it off on time with a better interest rate.
Ensure to Have a Repayment Plan
Since your debt is unchanged, make sure you have a repayment plan. If you take a balance transfer card, identify how long your introductory rate of interest will last. If it is for 24 months, ensure that you set up a budget and prioritize repaying the debt. This will help you avoid extraneous spending.
Look for Ways to Earn Extra Income
What better way to repay debts faster than by looking for additional income streams. Whether you will find a side hustle or take on more work at your place of employment, having extra income will help you pay off your balance as soon as possible.
How Refinancing Affects Your Credit Score
Without a credit score, you might not be able to take up many loans. So, how does refinancing affect it? Here are some negative things to look out for:
Hard Credit Inquiry
This inquiry is performed by a creditor before any refinancing application can be approved. This inquiry shows up on your report and it can have a negative impact on your credit score for some time.
Length of Your Credit History
This history accounts for about 15% of your credit score. When you take up a new loan, this will be calculated in your average, reducing your score.
Benefits of Refinancing
The following are some noteworthy benefits of this:
A Better Interest Rate
You are more likely to get a better interest rate when you refinance. This will lengthen your repayment duration and offer you more time to pay off the debt.
It Lowers Your Monthly Payments
If you cannot make your usual monthly payments due to the loss of a job, refinancing can allow you to reduce the monthly payments you make.
How to Improve Your Credit Score
Most times, you would need to have a good credit score before refinancing your current debt. For this reason, it is best to improve this financial grading. How can you do so? Here are some areas to look out for:
Know How it is Calculated
Knowing how your credit score is graded will help you do better. This is calculated based on the following factors and percentages:
- Payment history – 35%
- The amount owed – 30%
- Length of credit history – 15%
- New loan – 10%
- Credit mix – 10%
Pay Your Debt on Time
This might look simple but it is not always easy. You need to prioritize paying off debts over making unnecessary purchases; as earlier stated, payment history accounts for 34% of your grade. If you are consistent in paying bills on time, you will have a better grade and this will enable you to use refinansiering av kredittkort (credit card refinancing) to your advantage.
Making Recurring Payments on Time
These payments are not loans, but normal bills like utilities and cell phone charges. Paying them on time can boost your credit score.
Keep your Credit Utilization Low
This is the percentage you use out of your credit limit. For instance, if you have a limit set at 1,000 and you used up 500, your utilization percentage will be 50%. A lower percent is well appreciated by lenders. It allows you to apply for many loans.
Dispute Report Errors
It is possible for mistakes to occur in your report. This could pull down your score. Filing disputes for these errors on time can improve your grade. To identify errors easily, it is ideal to ask for your report regularly from the appropriate credit bureaus.
Having a credit card can be great for making quick purchases and earning rewards. But, it can also land you into debt if you are not careful. Checking out different options to refinance your debt is necessary and we have outlined different ways to do so.