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How Refinancing Credit Card Debt Works

April 23, 2019 · 5 minute read

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How Refinancing Credit Card Debt Works

Credit card debt adds up—and Americans have a lot of it. As a country we hit $1 trillion in credit card debt at the start of 2018 and the average American household has approximately $8,788 in credit card debt.

The problem isn’t just necessarily having credit card debt, not if we pay it off on time each month. The problem is when we fall behind in our payments because of emergencies or expenses cropping up, then our credit card debt starts accruing interest and penalties. Those quickly get added to what we owe, and pretty soon the debt grows until it can seem insurmountable.

If you end up in that position, then refinancing credit card debt at a lower interest rate could help you take control of your debt so you can make progress toward eliminating it completely.

Most of the time when people talk about refinancing credit card debt, they’re either talking about using a balance transfer credit card to pay off the existing debt at a lower interest rate, or taking out a low-interest personal loan to pay off the credit card debt—essentially a credit card refinancing loan. There also are a few other options to refinance credit card debt, including home equity lines of credit or 401(k) loans.So, which one is right for you?

Balance transfer credit cards are credit cards with a low-interest rate or a temporary period of zero interest that allows you to transfer your existing high-interest credit card debt onto the new card.

You typically need a high credit score to qualify. Once you’re approved, you transfer your existing high-interest credit card balance to the new card and then pay off your debt at a lower APR. Ideally, paying off the credit card debt on the card should be easier because there is little to no interest for a set period of time.

The other option to refinance credit card debt works similarly. You can apply for and take out a personal loan, and use it to pay off your existing credit card balance. Then pay off your loan at a lower interest rate with set monthly payments.

Some people also choose to take out a loan from their 401(k) to pay off or refinance their credit card debt. However, early 401(k) withdrawals incur high penalties. Or, if you own a home, you could use your home equity as a line of credit.

How to Use a Balance Transfer Credit Card

Here’s a few things you should know about balance transfer credit cards:

•  Balance transfer credit cards offer a temporary period where you can pay off your credit card debt without a high APR. Those introductory 0% APRs typically last anywhere from six to 18 months.

•  Balance transfer credit cards range in terms of the interest-free introductory period, the APR rates after that intro period, transfer fees, credit limits, and rewards. Most of the time, you need a high credit score to qualify. Do your research to find which balance transfer credit cards you qualify for and which make the most sense for you.

•  While you can transfer credit card debt from multiple cards, you can not transfer more debt than your credit limit on your new balance transfer credit card. If you have a lot of existing credit card debt, then you could then end up with debt on multiple cards.

•  Once you’re approved for a balance transfer card, it can take up to six weeks for the credit card company to contact your existing debt holders and transfer the debt. If you want to avoid late fees or penalties, continue to make any payments due during that period. After the credit card debt is transferred onto the new balance transfer card, your old credit card will have a zero balance, but it will not be closed until you choose to close it.

Consolidate your credit card
debt with a personal loan from SoFi.


Pros and Cons of Balance Transfer Credit Cards

When credit card debt starts to accumulate, the interest payments can quickly add up and add to what you owe, which makes it even harder to pay off. While your interest rate depends on your credit history, on average, credit card APRs range from 15% to 20% .

If you have debt piling up on a high-interest credit card, then it could make sense to refinance your credit card debt with a balance transfer credit card. The introductory low-interest or interest-free period could be just what you need to get out from under the burden of mounting interest.

Related: Personal Loan vs. Credit Card

The danger, however, is if you’re not able to pay off the debt by the end of the introductory period, then you could end up with another credit card bill and an interest rate that skyrockets.

Most balance transfer credit cards have an interest rate that goes up drastically after that introductory period. If you miss a payment, then you also risk losing the introductory rate. Additionally, balance transfer credit cards charge a balance transfer fee between 3% and 5% . That can add up if you’re transferring a large amount of debt to your new card.

Before signing up to refinance your credit card debt through a balance transfer credit card vs a personal loan, you’ll might want to do the math and make sure you’ll be really saving money, and that you’ll be able to pay off the credit card during the introductory 0% APR period.

If you end up with debt on the card that then accrues interest after the introductory period, you could be back where you started, which could impact your credit score.

Home Equity Lines of Credit or 401(k) Loans

Another option is what is known as a credit card refinancing loan. You can use any kind of loan to pay off existing debt, most commonly a personal loan. Some people choose to take out a 401(k) loan—essentially loaning themselves money out of their 401(k). However, taking money out of your 401(k) comes with a number of requirements from the IRS and can result in steep penalties.

Not all 401(k) plans offer the ability to take out loans. If they do, then you have to pay it back typically through payroll deductions at least quarterly within five years.

You may not be able to make contributions to your 401(k) while you’re paying back a 401(k) loan, which means you additionally lose that money and any potential employer match.

If you change jobs, the plan sponsor may require the full outstanding balance due immediately. And if you don’t pay it back, you could be hit with a 10% early disbursement penalty.

Some people—those who own property—can also use a home equity line of credit to pay off their existing debt and then pay down that home equity loan or line of credit. A home equity loan is a regular loan with a set interest rate, tied to your house as collateral.

The danger, of course, is both are secured by your house and so if you miss payments, you could potentially lose your home.

Personal Loans as an Option to Refinance Credit Card Debt

Personal loans can be another option for refinancing credit card debt. A personal loan gives you access to the money you need to pay off your debt at a low interest rate, usually without requiring you to put up any collateral, which means your house and 401(k) won’t be impacted as you pay off your debt.

The application process generally involves a credit report and basic financial history. SoFi personal loans also take into account things like your career prospects, your income v. financial obligations, and your financial history.

If you’re approved, you can use the personal loan to pay off your high-interest credit card debt. You then would just have to make the monthly payments on your personal loan at a lower, fixed interest rate over the life of the loan (loan terms of 2-7 years). And when you take out a personal loan with SoFi, there are no origination fees or prepayment penalties.

An added benefit is that personal loans be used for any number of personal expenses, which means you can also pay off other debt, such as high-interest car loans.

If you’re looking to consolidate credit card debt at a lower interest rate, then a SoFi personal loan could help you pay off your debt and at a low interest rate.


The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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