About Refinancing Credit Card Debt

If you are carrying balances on high interest rate credit cards, you may benefit from refinancing your credit card debt. Instead of making minimum payments on credit card balances that only seem to get larger each month, it is much better to move credit card balances to financing options with terms that allow more of the money you pay to go toward reducing the actual principal of the debt you owe.

Significance

Since credit card interest rates tend to be quite high, often refinancing credit card debt is the best solution for paying off balances and making forward progress toward becoming debt-free. Changing from high interest revolving credit accounts to more affordable forms of financing can be an excellent way to get credit card debt under control.

Types

There are several ways to approach refinancing credit card debt. If you own your home, refinancing your mortgage loan can help you reduce your credit card debt. If you have equity in your home, any amount of money you get from refinancing can be applied to your high interest credit cards. Instead of paying high credit card interest rates, the outstanding balances on your credit cards will become part of your home loan, reducing the interest rate to that of your home loan. Credit card debt can also be refinanced using the proceeds from a home equity line of credit. Both of these options allow many homeowners to claim a tax deduction for the interest paid on the loan.

If you don't own your home or have a sufficient amount of equity, but have a positive credit history, you may be able to get an unsecured personal loan with a lower interest rate than that of your credit card accounts. Another option for refinancing credit card debt is to take advantage of low interest rate credit card offers, transferring balances from one card to another to enjoy an interest rate reduction.

Benefits

Refinancing credit card debt can greatly reduce the amount of time it takes you to become debt-free. Because most revolving credit accounts carry high interest rates and compound interest charges daily, it can take an extremely long time to pay off balances. If you are making minimum payments on a high interest credit card virtually all of the money you are paying is going to interest, making it virtually impossible to ever become free from the debt. When credit card balances are transferred to lower interest rate accounts or to installment loan programs, you can make greater progress toward paying off the debt, even without increasing the amount of your monthly payments in many cases.

Considerations

Utilizing credit card offers with low or zero percent interest rates for an introductory period can be a good way to enjoy reduced interest rates for many people. However, when using this technique for refinancing credit card debt, make sure that you fully understand the fine print of the new account and keep up with when the introductory period expires. Before the account changes to the standard account interest rate, which may be higher than that of your original credit card, you need to be poised and ready to transfer the balance to another new account with favorable terms.

Warning

Once you refinance your credit card debt, it is essential to stop carrying a balance on the original credit card accounts. Many people find themselves in financial trouble because they move credit card debt to a home loan, personal loan or new credit account, yet charge the original credit cards up again. Such behavior is dangerous, and results in more debt in the long run rather than less.