Credit Card Refinancing: Pros and Cons
Are personal loans a better solution to credit card refinancing?
When trying to pay off credit card debt, there are a few steps you can take to speed up the process, pay less interest and achieve financial freedom faster. If you’ve been keeping up with our articles here, you know that paying more than the minimum monthly payment, refinancing, consolidating debt and taking out a personal loan are a few options you can take advantage of.
What is credit card refinancing?
Credit Karma explains that “Refinancing means that you pay off your current loan with a new one. People typically choose to refinance in exchange for a loan with better rates that’ll lower their monthly payments and save them money on interest and fees over time. Many types of loans have refinance options, including mortgages, auto loans, student loans, and personal loans.”
Even though many consumers choose this option in order to get better rates, there are several pros and cons that could affect your financial situation when going this route.
The pros of credit card refinancing
Refinancing is a great idea if you’re trying to lower your interest rate, trying to pay off your credit card debt faster or are struggling to make the minimum monthly payment. ValuePenguin.com says, “As long as you’re lowering your interest rates, and you are fully aware of any additional costs involved, this can be a good alternative to opening a balance transfer credit card.”
Remember that in order to refinance a better rate, your credit score will be taken into consideration, so if you have a good to excellent score (generally speaking, a credit score of above 700 is considered good), or it has improved since the last time you took out a loan, you should definitely consider this route.
The cons of credit card refinancing
- Hard Inquiries
- Unlike soft inquiries, hard inquiries affect your credit score by a few points as lenders review your credit report in order to make a decision. Click here to learn more about hard and soft inquiries.
- Loan History
- If you’re paying off a credit card and taking out a new loan, this last account will show no credit history on your report. As Credit Karma explains on their website, “if you had your previous loan for many years, this could feel like a sudden blow to your credit health, especially considering how heavily your payment history is factored into your credit score.”
- New Purchases
- When taking out a loan to pay off credit card debt, it’s easy to fall back into the same habits and keep using the credit card for purchases. This is a big don’t when it comes to refinancing, as if you do this, you’ll end up back where you started and with additional debt, as now you could have a maxed out credit card and a loan to pay.
- Early Payment Penalizations
- It is not uncommon for lenders to charge a penalization fee for paying out your loan earlier than expected. Therefore, it’s important to find out if this fee will be worth the new loan when shopping around for the right lender for you.
Why take advantage of personal loans when refinancing?
The chief benefit to personal loans is that unlike a credit card, personal loans are close-ended and not revolving. This means that after every loan payment you will be closer to paying it off, whereas credit cards are revolving when you continue to use them after every monthly payment, making it harder to pay it off.
Additionally, many times personal loans offer lower interest rates based on your financial situation, helping you pay a lower total amount at the end. If you’re not sure about what you can afford based on your income, it’s always a good idea to contact a financial advisor.
If any items on your financial report look like they might be wrong, click here to find out how credit dispute letters can help you ensure your credit score is as accurate as possible.
LendingPoint is a personal loan provider specializing in NearPrime consumers. Typically, NearPrime consumers are people with credit scores in the 600s. If this is you, we’d love to talk to you about how we might be able to help you meet your financial goals. We offer loans from $2,000 to $25,000, all with fixed payments and simple interest.