When we hear the term refinancing, the first thing that comes to mind is mortgages; this process is very common to alleviate some of the financial burdens of mortgage debt. Refinancing is useful for those who need to pay off debt and change the contract terms.
Recall that this process consists of reaching an agreement with a lender, who pays the entire debt and generates a new borrower relationship with this new agreement. The question is, is there such a thing as credit refinancing? Here we will tell you a little bit about this process.
All about credit card refinancing
Refinancing a credit card is different from the term refinancing a mortgage. This process reduces the interest generated on the credit card to a much lower value than the current one.
This process works by moving the credit card balance to a different card from a lender with a lower interest rate for a limited time. With a refinancing, it is possible to get to 0% interest for up to 21 consecutive months.
To achieve this, the customer must have a card that gives the option to transfer the balance and apply for a card with 0% interest, which is where you want to transfer the debt. It is important to have a high credit score to have these benefits.
The objective of doing a refinancing is not to get rid of the debt but to reduce the amount of interest that the credit card with the debt is accumulating while paying the balance and interest with a much lower commission.
There are two options when refinancing, you apply for a new account or use a lender to transfer the balance. They will pay off your card, and you will pay in fixed monthly installments until you pay off the debt that the lender paid.
How does credit card refinancing work?
With a refinancing, you can transfer the balance of a credit account with high-interest debt to a new card where the same level of interest will not be charged. For no interest to be charged, it must be used within the promotional period, which lasts between 12 and 21 months.
At the end of the promotional period, if the debt is still being paid off, standard interest rates begin to be generated, meaning it could be between 16% and 20%. However, this is still profit than paying the percentage that the original card will give for the existing debt.
To achieve a successful refinancing, we explain the debt settlement process with this banking process.
Apply for a 0% credit card or a lender
When applying for a credit card, 0% interest is recommended. However, to do so, you will need a high credit score. If you don’t have the minimum score, it doesn’t matter. You can apply for a transfer credit card with a lower interest rate.
You can go through a lender if you don’t think you qualify for approval for a new card.
The new card pays off your order balance
This new card will serve to pay off the balance of the old credit card; with this, you will begin to pay off the debt on the new card, but the difference is that this one will either have no interest or the interest rate will be lower than the old card.
This means that you are absolved of the old debt, and you commit to paying this new debt with the new credit card. In the case of a lender, the lender will transfer the debt balance to your credit card, and then you will pay the lender.
Start paying monthly
Once the balance transfer is done, either from the new card with the lower interest rate or with the lender, you start making monthly payments until the new debt or loan is paid off.
But, generally, you’ll need good credit to get a personal loan. While some lenders offer personal loans for people with bad credit, those loans tend to have higher interest rates.
Is it worth it to do a credit card refinancing?
You indeed paid off one debt to get into another, so it’s common to wonder if it’s worth it to refinance a credit card if you have to pay off the newly acquired debt.
But the amount of money you could save by refinancing is quite high. The interest payment alone can double the balance due eventually; with refinancing, you are saving all those dollars that go towards the interest tax imposed by the bank.
Let’s give you an example: the client has to pay the debt of $10,000 on his credit card, which is being charged 20% interest per month. Refinancing to a 0% card, he saves about $2000 in the first year alone.
This savings is possible as long as the borrower makes his payments on time and there are no bank penalties or special fees.
You still save considerably if you do not have a 0% interest credit card. For example, if the new card to which the debt was transferred charges 10% instead of 20% of the card with the original debt, the customer would be saving about $1,000 a year.
Added to this, if the new card has a high enough credit limit, you can pay off not just one card but several, which would mean that the debt on this new card would be higher, but considering that you would not be paying the interest on other cards, it is still beneficial.