What is credit card refinancing and how does it work?

In 2021 Americans had an average credit card balance of $5,525, according to Experian. Although that’s down 6% from 2020, it’s still a lot of money — so it’s not surprising that people look for cheaper ways to pay off their high-interest balances.

Credit card refinancing is one option for paying down high-interest credit card debt. Refinancing pays off credit card debt by combining several credit card payments into a single personal loan payment with a lower, fixed interest rate.

• How does credit card refinancing work?
• Where to get a credit card refinancing loan
• How to get a personal loan to refinance credit card debt
• Pros and cons of credit card refinancing with a personal loan
• Credit card refinancing vs. credit card debt consolidation
• Alternatives to credit card refinancing

How does credit card refinancing work?

Credit card refinancing replaces one or more high-interest credit card balances with one lower-interest, fixed-rate loan. By refinancing credit card debt into a personal loan, you can get a rate that doesn’t change, predictable payments, and a definitive date for when you’ll be done paying off the debt.

You’ll receive the loan funds as a lump sum deposited into your bank account, or your lender may pay off your credit cards directly. You’ll then repay the loan in fixed monthly payments that won’t change throughout the repayment term. Most personal loans are unsecured, meaning you don’t need to have collateral to get the loan.

But you’ll generally need good credit to get a personal loan. While some lenders offer personal loans for bad credit, those loans typically come with higher interest rates.

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Where to get a credit card refinancing loan

When you need to get a personal loan to refinance your credit card debt, you have a few borrowing options:

• Banks and credit unions — Not all banks and credit unions offer personal loans, but those that do generally have more involved application processes and higher credit score and income requirements than online lenders. But if you have an existing relationship with a bank or credit union, you may be eligible for discounts.
• Online lenders — If your credit is fair or even poor, you may still be able to get a personal loan from an online lender. Because they don’t have the overhead associated with maintaining physical locations, online lenders may be able to offer lower interest rates and faster funding.

If you like the flexibility and convenience of online lenders, you can easily compare your prequalified personal loan rates from multiple lenders with Credible. It’s free, fast, and won’t affect your credit.

How to get a personal loan to refinance credit card debt

The application process for a personal loan is essentially the same for online lenders, banks, and credit unions. But the qualification requirements and approval time may differ quite a bit. Generally, you’ll need to follow these steps:

1. Check your credit. Although the three national credit-reporting agencies — Equifax, Experian, and TransUnion — don’t usually provide credit scores for free, you might find yours from a loan statement or credit card company. You can also check out free credit-scoring sites online.
2. Compare rates and loans. By looking at interest rates and loan offers from multiple lenders, you can increase your chances of finding the best personal loan available to you.
3. Explore lender requirements. Depending on the lender, you may (or may not) qualify for a personal loan. Lenders generally want borrowers to have good to excellent credit, steady employment, a positive credit history, and a low debt-to-income ratio. Be sure you have a good chance of meeting lender requirements before you apply for a personal loan.
4. Get pre-approved. Many lenders offer the chance to get pre-approved. Your credit score typically won’t take a hit, and you’ll have a better opportunity to compare lenders and their rates and see if they offer any discounts. You can also see whether they charge any fees, like application or origination charges or prepayment penalties.
5. Choose a lender. Once you’ve done your homework and gotten pre-approved with multiple lenders, it’s time to pick a lender and loan offer that works best for your financial situation.
6. Gather your documents and apply for the loan. The application process will go a lot faster if you have all your documents on hand when you apply. This may include bank statements, proof of age and employment, contact information, and your Social Security number.
7. Sign your loan agreement and receive loan funds. If you’re approved, you’ll sign a formal loan agreement and the lender will deposit your loan funds into your bank account. This typically takes anywhere from the same business day you’re approved to seven business days, depending on the lender and your bank.

Factors that affect eligibility

Lenders consider certain factors when making loan decisions, including:

• Your credit — Credit scores range from 300 to 850. Lenders view credit scores as a measure of how well you manage credit. A lower score may indicate you’re at greater risk of defaulting, while a higher score may mean you’ll repay the loan as agreed.
• Employment and income — Lenders look for sufficient income and steady employment when considering you for a credit card refinancing loan. They want to know you can make the payments and often lend amounts in line with your income.
• Debt-to-income ratio — Your DTI ratio is how much money you spend each month to pay off your debt as a percentage of your monthly income. Lenders prefer a low DTI but may still offer a loan with a higher DTI if you have a good income and excellent credit.

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Factors that affect personal loan costs

Lenders consider multiple factors when deciding what interest rate to offer you, and all of them — along with the interest rate — can affect how much you’ll pay over the life of a personal loan. These factors include:

• Interest rate — The interest rate on a credit card refinance loan will affect your monthly payment. The lower the interest rate, the lower your payment, and vice versa.
• Repayment term — Longer repayment terms generally cost more and come with higher interest rates. The longer the repayment term, the more interest you’ll pay, but your monthly payment will be lower. A shorter term will likely raise your monthly payment, but you’ll pay less interest over time. You’ll also pay off your loan faster.
• Fees and penalties — Some personal loans come with fees that cover the cost of processing your loan. These fees add to the cost of borrowing. Lenders may also charge a prepayment penalty if you pay off your loan before the end of the term.

Pros and cons of credit card refinancing with a personal loan

Every financial product has its advantages and disadvantages. It's important to weigh each pro and con before deciding on a personal loan to pay off your high-interest credit card debt.

Pros

• Personal loan interest rates are typically lower than credit card APRs, so you can likely get a lower rate and pay less in interest.
• Combining multiple credit card balances into a single personal loan can simplify your debt and make it easier to stay on top of payments.
• Personal loans typically have fixed interest rates, so your interest costs and monthly payments will stay the same throughout the repayment period.
• You’ll know exactly when your debt will be completely repaid, instead of your debt being open-ended as it is with revolving credit.

Cons

• It can be difficult to qualify for a personal loan if you have poor credit, and you’ll probably need good to excellent credit to qualify for the lowest interest rates.
• Application and origination fees and other charges can add to the cost of your loan.
• Although you’ll save more in interest, your personal loan could have a higher monthly payment amount than the minimum payment on your credit card.
• If you take out a loan to pay off your credit cards but continue to run up balances, you could get deeper into debt.

Credit card refinancing vs. credit card debt consolidation

Refinancing and consolidating are two options for dealing with credit card debt. Your credit score and how much you owe often determine which is better for you.

As a general rule, if you find it hard to manage multiple payments each month and would rather have only one, a debt consolidation loan is best. If you have no trouble keeping track of multiple payments but want the lowest rates and loan terms, refinancing may be a better choice.

Credit card consolidation

Consolidation doesn’t pay off your credit card debt — it simply changes the interest rate and terms.

A balance transfer card with a 0% promotional rate is one option for consolidating your credit card debt. You take out a card with an interest-free introductory period and transfer multiple existing card balances to the new card.

If you can pay your balance in full during this period, you won’t pay any interest. But if you don’t pay it off before the introductory period ends, the interest rate (and your payment amount) can go way up. You may also pay balance transfer fees, which are typically 3% to 5% of the transferred balance.

Credit card refinancing

Refinancing your credit card debt with a personal loan pays off your credit card debt entirely and converts your high-interest, revolving debt into a fixed-rate loan with a definitive payoff date.

Refinancing your credit card debt can help improve your credit score and credit history if you continue to make on-time payments. But if you go over your credit limit or make late payments, your credit score will take a hit and you could face a penalty APR (which is typically much higher than a credit card’s regular APR).

Alternatives to credit card refinancing

If you decide a personal loan isn’t right for your credit card refinancing needs, you do have other options:

• Tap your home equity — A home equity loan or home equity line of credit (HELOC) can both allow you to borrow against the equity in your home. A home equity loan is a fixed-rate loan that gives you a lump sum upfront. A HELOC allows you to draw as needed against a set credit limit, much like a credit card. Your home is collateral for both types of loans, so defaulting on them could put your home at risk of foreclosure.
• 401(k) loan — A 401(k) loan allows you to borrow money from your employer-sponsored retirement account, which you’re obligated to pay back with interest. The approval process is often quick and easy. But taking a loan against your retirement plan cuts into the account’s growth. And if you fail to repay the loan on time, you’ll have to pay taxes and a penalty on the amount you borrowed.
• Debt management and credit counseling — If you’re dealing with a lot of debt, it’s not always easy to know what the solution is. Debt management and credit counseling can provide tools to help pay off your credit card debt faster at lower interest rates. A debt counselor can help you identify the root cause of your credit card debt and provide a solution to pay it back. They may even help you create a monthly spending plan and budget so you can avoid going into debt again.