How to refinance your credit card debt

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November 1, 2023

6 min read

If you owe a lot of money on your credit cards, you may be looking for ways to save money while paying off your debt. Balance transfer credit cards and debt consolidation loans are two refinancing tools that can help you do just that. Is refinancing a good option for you? In this article, we’ll walk you through the choices and explain how they work, so you can decide if you want to refinance.

Here’s what we’re going to cover:

What is credit card refinancing?
What are balance transfer credit cards?
Advantages and drawbacks of balance transfer credit cards
What are debt consolidation loans?
Advantages and drawbacks of debt consolidation loans
Which refinancing method should you choose?
Can refinancing hurt my credit?
Oportun: Affordable lending options designed with you in mind

Key takeaways:

Credit card refinancing, sometimes called debt consolidation, is the process of moving all your debt to a single loan or credit card.
One way to refinance is to take out a balance transfer credit card. These cards often come with an introductory period when you pay no interest, making it easier to get out of debt.
Another method is to take out a loan to consolidate debt. This can make your monthly payments more predictable, and you may be able to get a lower interest rate.
Both these methods of refinancing have advantages and drawbacks. The right option for you will depend on your situation.

What is credit card refinancing?

Credit card refinancing is the process of moving all your debt to a single loan or credit card. The goal is to get a lower interest rate or lower payments. It also gives you the convenience of making debt payments to only one company.

Because so many people are trying to reduce their credit card debt, there are specific tools to help with this.

What are balance transfer credit cards?

One popular refinancing method is the balance transfer credit card. Most of these cards come with an introductory period, typically 12 to 18 months, when you pay no interest. If you transfer all your debt to one of these cards and pay it off completely within the introductory period, you’ll save money on interest. Making regular, on-time payments can also help you establish a positive credit history.

What are interest and interest rates?

Interest is the amount of money you pay your lender to borrow money, essentially the cost of borrowing. This is in addition to paying back the original loan amount. Interest is determined by the interest rate, which is a percentage of the amount you borrow.

Advantages and drawbacks of balance transfer credit cards

The big advantage to balance transfer credit cards is saving money on interest. If you pay off all your debt within the introductory period, you may not have to pay any interest at all.

Another benefit is being able to control the amount of your monthly payments. Some months, you may choose to make only the minimum payment. During months when you have more money available, you may want to make larger payments to help you get out of debt faster.

But there are also downsides to refinancing with a balance transfer credit card. For example:

Credit limit may not cover your debt
Interest rate may be high after the introductory period ends
You may have to pay a balance transfer fee
Variable interest charges may differ each month

What are debt consolidation loans

Another method you may want to consider is transferring your credit card debt to a low-interest loan. There are several types of loans you can use for this process.

Personal loans

Taking out a personal loan is one way to refinance your credit card debt. Because personal loans offer fixed interest rates and fixed repayment periods, your scheduled payments will be predictable. You may also be able to get a lower interest rate than what you’re paying on your credit card. This could help you save money on interest.

Home equity loans

If you own a home, you may be able to take out a home equity loan to consolidate your debt. This type of loan borrows money directly from the equity you’ve built up in your home. Like personal loans, most home equity loans have fixed interest rates and fixed repayment periods.

What is home equity?

Equity is the difference between your home’s market value and the amount you still owe on your mortgage. You can think of equity as the portion of your home that you currently own.

401(k) loans

Another option for debt refinancing is a 401(k) loan. With this type of loan, you borrow money from your 401(k) retirement account. Because you’re using your own money, you don’t have to pay interest to a lender. However, there are many restrictions on these loans.

Advantages and drawbacks of debt consolidation loans

Here are some things to consider with debt consolidation loans. The major advantages are:

Fixed interest rate
Fixed loan period
Predictable monthly payments
Larger loan amounts

One drawback to this method is that it may be harder to get approved for a loan than for a credit card. To qualify for a loan, you may have to put up collateral. Collateral is something of value that you agree to give the lender if you don’t pay back your loan. Home equity loans, for example, use your home as collateral. If you fail to repay the loan, you could end up losing your home. Many personal loans do not require collateral to secure the loan.

Which refinancing method should I choose?

Now you know the difference between balance transfer credit cards and debt consolidation loans. But how do you decide which option is right for you? Here’s a quick guide.

Balance transfer credit card

If you have a small amount of debt that you can pay off in a short time, a balance transfer credit card may save you more money. It can also be a better option if you prefer lower monthly payments.

Debt consolidation loan

If you have a larger amount of debt, a loan can give you more time to pay it off in fixed, scheduled payments. You’ll also have know a specific date when you’ll be out of debt.

Can refinancing hurt my credit?

How do these refinancing methods affect your credit score?

Any time you apply for a new credit account, the lender makes a hard inquiry into your credit report. This can cause your credit score to drop temporarily by a few points.

What are my credit report and credit score?

Credit report: A written or digital record containing the details of your past and present payment history and credit use

Credit score: A three-digit number based on this information

In the long run, refinancing your debt could actually help your credit score. By making all your payments on time and reducing your debt balances, you may be able to earn a higher credit score.

Oportun: Affordable lending options designed with you in mind

Now that you understand how to refinance or consolidate debt, you can learn about how Oportun may be able to help you if you’re looking for affordable credit options. Visit our homepage to learn about: