Credit cards are handy financial tools that can be your best friend but also your worst enemy. As long as you use this piece of plastic sparingly, don’t exceed a 30% card utilization rate, and pay off your card balance regularly, you won’t have any problems. Moreover, these actions can boost your credit score and help you build a solid credit history.
The problem arises when you start enjoying the convenience of spending money you don’t currently have and falling behind your financial obligations. You can decide not to pay off the full balance on the credit card every month but roll over it. But when that period ends, you can be unpleasantly surprised with a large debt on this credit line, plus the interest.
It would be best to avoid this scenario by using a credit card responsibly. But if you already struggle with a high balance, you need to implement a more radical solution. Luckily, there are ways to refinance and even eliminate this debt.
Balance Transfer
Source: cnbc.com
A balance transfer is one of the most cost-effective ways to refinance and pay off your card balance. This method refers to “converting” this debt into a new one and not paying interest, at least for a certain period. Most issuers allow the introductory period for new card users, which can last up to 21 months. During this intro period, your interest is 0%.
Possible costs you can have are a one-time fee of 3-5% of the balance that you transfer to the new card. Lenders generally set a maximum amount of debt that you can refinance in this way. If your card balance exceeds this limit, you may need higher limits or an additional balance transfer card.
If you decide on this method, make the most of the promo period. While you’re not paying interest, your monthly payments can be lower, so it’s advisable to pay off most, if not all, of your previous card balance. After that, the interest can be rather high. Also, always make timely payments to avoid losing benefits like a 0% introductory rate.
Consolidate Your Credit Card Debt(s)
Source: time.com
Another option to consider is refinancing card debt with a debt consolidation loan. It’s a financial arrangement to gather all your monthly payments into one and consolidate all the interest you pay on different lines of credit into one. In this way, you achieve significant savings and can better manage your payments.
You can get a debt consolidation loan from a lender, bank, or local credit union. The amounts you can borrow range from several hundred to tens of thousands of dollars, with a repayment term of up to seven years. Lenders have a fairly wide offer of these arrangements, adapted to the needs and possibilities of borrowers.
Debt consolidation loans can be unsecured and secured. The first carries a slightly higher interest but less risk for borrowers. These are generally intended for those with an impeccable credit history and excellent credit score. You might want to check loan offers on besterefinansiering.no/refinansiering-av-kredittkort/.
Secured arrangements require collateral, that is, some asset, as a guarantee of loan repayment. Lenders can suggest this arrangement when you want to borrow more money or have a poor credit score. The purpose of collateral is to diminish any risk of loan default. In that case, lenders can seize and use this asset to recoup eventual losses.
Refinance with Home Equity Loan
Source: afcu.org
When your credit card debt is high, the previous refinancing methods aren’t very helpful. The same goes when your credit score isn’t excellent, so you can’t count on cheap refinancing. In this case, you can tap into your home equity, which is doable in two ways.
The first is to cash in home equity, refinance the mortgage, and get extra money to pay off credit card debt. The second way is to take out a home equity loan and use it to pay off the balance in full. These two differ because, in the first case, you replace one loan with another, while in the second case, you take an additional loan on your real estate account, along with your current mortgage.
This method of refinancing is handy when you need a larger amount of money that you don’t pay high interest on. Considering that your house is used as collateral in both cases, this loan can carry low-interest rates and fees, which makes them very favorable. However, the fact that your home is collateral involves certain risks because you can be left without a roof over your head if you fail to repay this new debt.
Borrow from Your 401(k)
Source: sdretirementplans.com
This method should be a last resort when none of the previously described refinance options work. It can be a good quick fix, but it’s risky and requires complete dedication and responsibility. Otherwise, you may face financial and legal consequences.
By borrowing against your 401(k), you use your savings to refinance credit card debt. You borrow money from yourself, so there are no costs like when you borrow from banks or lenders. You pay symbolic interest (usually 1%) until the final debt payment, and all that money goes into your retirement account.
This refinance method is acceptable when you have a bad credit score, so you can’t assess conventional refinance arrangements. Also, this borrowing doesn’t affect your credit score nor require a credit check to use it.
However, keep in mind that refinancing card debt this way reduces your retirement funds. Also, you don’t get any compounding interest. And in case you lose your job or quit, you have to repay this loan as soon as possible.
Unpaid credit card balances can put you into a vicious circle of financial trouble. There are different ways to get rid of this debt, and once you do that, make sure to not repeat the same mistake. Use your credit card wisely and be responsible for your financial obligations.
