Credit cards can be a great way to build your credit score and earn rewards, but they can also be a major financial burden. Credit cards are one of the largest sources of American consumer debt, with consumers paying roughly $120 billion per year in credit card fees and interest. Thanks to these high-interest rates and added fees, debt can quickly spiral out of control, leaving consumers feeling overwhelmed.
If you are having trouble paying off credit cards, refinancing your credit card debt with a personal loan may provide some relief and help you pay off debt faster, thanks to lower interest rates or consolidating multiple payments into one. Learn more about personal loans, how they can help with credit card debt, and the risks associated to see if they are a good fit for you.
What is Credit Card Refinancing?
Credit card refinancing is a tool to take your current credit card debt and make it easier or faster to pay off, typically by transferring multiple credit cards into a single lower-interest card or by consolidating debt into a single payment through another debt consolidation method.
There are a few options for refinancing your credit card debt, but the best option depends on your financial situation. A few options include:
- A personal debt consolidation loan
- Balance credit card transfers
- Non-profit debt consolidation with a debt management plan
- Home equity loan
- 401k plan loan
The best option for you is a matter of personal preference, but it will largely depend on your credit history. Those with good credit may qualify for a balance transfer credit card.
A balance transfer card often offers a low or no balance transfer fee and an APR as low as 0% for an introductory period of 12 to 21 months, resulting in significant savings. But those with poor credit may struggle to qualify for balance transfer cards and should instead seek other loan options, such as a nonprofit debt consolidation program.
Refinancing Through a Personal Loan
A personal loan, sometimes called a debt consolidation loan, is large enough to fully pay off all credit card debt. There are two main reasons why a personal loan is better than having the same amount of debt on credit cards.
- Lower interest rates. Depending on your credit score, personal loans will have lower interest rates than credit cards. This saves you money in the long run and makes it easier to pay off the debt faster.
- Single payment. A loan will have a single monthly payment, whereas the debt on five credit cards will have five separate payments. A single payment may be lower than your five payments, is easier to manage, and is intended to be paid off in a timely manner, typically in three to five years. Whereas only paying the minimum balance on credit cards may take more time to pay back.
Unsecured personal loans, like a debt consolidation loan, do not require collateral, making them an excellent option for those who need immediate relief from credit card debt but don’t have the funds to pay a large sum upfront. However, qualifying for a debt consolidation loan is solely based on your credit report, which may disqualify many with poor scores.
Your credit score also determines the interest rate you are offered. A poor credit score will likely only be offered at higher interest rates than your current credit card rates. Consolidating your credit card debt with a personal loan only makes sense if you are offered a lower rate than your credit cards. The same, or higher rate, won’t help you pay off your debt any faster.
Personal loans for credit card debt can be obtained through traditional banks, credit unions, or online lenders. After qualifying for a loan, some lenders will deposit the money in your bank account. Others will require direct payment to credit card companies to ensure the funds are being used for the intended purpose.
Comparing Debt Consolidation Loans
Getting any loan, even one to pay off debt, deserves serious consideration, taking into account the various factors that will impact your financial stability in the future. When looking into loans, consider the following:
- Repayment terms. When shopping around for loans, you may get a wide range of repayment terms (the length of your loan) to choose from. Some lenders offer you a few term options, while others only give you one choice. More repayment term options allow you to customize your loan better for your unique financial situation. A longer-term means lower monthly payments, while a shorter term means less interest paid.
- Interest rate. The annual percentage rate, or APR, is the included interest or fees associated with the loan. The lower the APR, the less you will pay in interest and the overall loan. When shopping around for a personal loan, your interest rate must be lower than the rate on the credit cards you will be paying off.
- Special offers. Lenders focusing specifically on debt consolidation often offer special perks that might make your debt consolidation process easier. These offers might include a discounted rate for consolidating a specific type of debt, no origination fees, sending loans directly to creditors, or monitoring your credit score as you become debt free.
How to Get a Debt Consolidation Loan
Getting a personal debt consolidation loan can feel intimidating, but with some guidance, it can be very straightforward.
Add Up Your Current Credit Card Debt
The best way to start is to get a better idea of your total debt, your monthly payments, and the combined interest for all debt. When shopping around for loans, think about the total loan amount needed to cover your debt and the current combined interest rate to ensure the loan stays under that rate.
Compare Loan Options
When comparing loan options, getting pre-qualified with a few different lenders is a good idea. Pre-qualifying doesn’t affect your credit score but allows you to see potential loan terms, interest rates, and monthly payments, getting you a better idea of which option is best for you.
Apply for a Loan
When you’ve decided on a lender, it’s time to apply. Most applications are online and will ask you for your address, contact details, Social Security number, proof of identity, employment, and income. Once you apply, the lender will decide on your application. You will need to sign the loan agreement and receive the funds if approved. You may see the funds the same day you sign the loan agreement, or it may take multiple business days to receive them.
Pay Off Credit Cards
If your lender doesn’t insist on paying the debt directly, you must pay the debt. Most debt consolidation loans instruct that the loan must go towards paying off the debt. You may risk violating the loan terms if you don’t pay your credit cards. Even if your loan didn’t have any specific terms, if you don’t pay off your debt immediately, you risk using the money for other purposes or forgetting about it and essentially doubling your debt for no reason.
Begin Making Payments on Your Loan
Once you’ve paid off your credit cards, it’s time to start paying on your loan. Loan payments will be once a month, and it’s always recommended to set up automatic payments to avoid missing payments. Plan to pay off your debt faster by making additional payments if you can. There are typically no rules for paying off a personal loan early, so making additional payments may save even more on interest and pay the loan off faster.
Keep Credit Card Balances as Low as Possible
Now that you have no credit card balances, it might be tempting to use your cards again. But depending on how you came into credit card debt, this might be a slippery slope of creating even more debt. Choose either not to use your credit cards until your loan is paid off or use them only for small, essential purchases you have the money to pay off immediately.
Risks of Refinancing Credit Card Debt with a Personal Loan
When considering getting a personal loan to refinance your credit card debt, it’s essential to think about any consequences there might be for taking out the loan.
It may lower your credit score. Getting a personal loan may lower your credit score for several reasons:
- Hard inquiries from loan applications
- New credit account
- Lower average age of credit
While refinancing can hurt your credit score, these credit score changes may not last. As long as you make a full, on-time payment each month, your credit score should rebound quickly, possibly even higher than what it was with your credit card debt. That’s because you will lower your credit utilization ratio.
The ratio is based on the total credit you have vs. what you currently use. A new loan may add a significant amount to your available credit while lowering the ratio. For example: If you had $20,000 available credit from three different credit cards but were using $10,000, that’s a 50% ratio that can significantly impact your credit score. Taking out a $10,000 loan to pay the credit card debt will take your available credit to $30,000 while you are still only using $10,000, an immediate drop to 33% utilization.
You may end up with more debt. If you took out the loan to pay off credit card debt but still carry balances on your cards even after paying them off, you risk holding onto even more debt.
Understand Personal Loans for Credit Card Debt with Finance is us
If you’re considering refinancing your high-interest credit card debt with a personal loan, it’s important to understand the process, how to choose the right loan, and the risks involved in taking out a loan while already in debt. Taking the time to think over all possibilities will ensure that you aren’t rushing into
Reading more of our loan articles can help you understand the process of getting loans, choosing the best one for you, and how to effectively pay off loans. Our online resources help those in need of financial advice to make the best decision for their current finances and to create a better financial future.
Whether you need to make a big change to get out from underneath the burden of credit card debt or just want to pay them off quicker, we can help you decide which repayment option is best for you.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.