Should you refinance credit card debt?
Please note, I am NOT compensated by any credit card company. This is one of the few places you will find unbiased advice about whether to refinance your credit card debt.
You might be surprised at the type of people who ask me whether to refinance credit card debt. Often, they’re responsible high earners who simply lost track of their spending for a bit. These are people just like you and me.
Studies have shown that people instinctively have a harder time monitoring spending on credit cards than on cash (MIT, 2001)
Fortunately, there is a good option available to many people: a 0% balance transfer. This is where you take balances from a single or multiple credit cards and consolidate it into a card with 0% interest for 12 to 20 months. This temporarily lowers your interest rate to zero and makes it easier for you to pay off the debt.
Why refinance debt with a 0% card?
Rather than use collateral or high-interest rates to borrow, people with high credit scores can use offers from credit cards to their advantage. 0% APR cards are introductory rates offered by some credit cards as a marketing tool. But for those who are responsible with money, they can use these rates to temporarily lower their credit card interest and make it easier to pay off.
Should you refinance your credit card debt?
There are four considerations you should take when you consider refinancing your credit card debt.
Follow this checklist to see whether refinancing your debt is the right move for you.
1. Is your credit score over 710?
You need good credit to open a new card
Typically, card issuers look for scores of at least 690 for a 0% interest card.
But 710 instead of 690?
Opening a new card has the potential to decrease your credit score. If you were already at 690, lowering your credit to 670 or below can have unintended effects elsewhere. Utilities, phone companies, and internet providers often check credit scores to determine eligibility for better terms.
More importantly, you need to be sure your credit score is high enough to qualify for a second card if you need one. If you are unable to repay the first 0% card in the first 12-20 months, you may have to open another 0% card to transfer the balance.
2. Have you opened fewer than 3 credit cards recently?
Opening more than 3 cards over 3 years can harm your credit score.
Credit unions keep their calculation secret on purpose. If people knew the formula to credit scores, they could game the system. So instead, the three credit unions (Experian, Transunion, and Equifax) keep their methodologies secret.
As a general practice, however, I recommend you avoid opening more than three credit cards over the span of three years. Opening some credit is important, but like too much of a good thing, opening too many cards at once can signal financial imprudence to the monitoring companies.
3. Do you have a debt repayment plan?
Having a good plan is essential
Interest on 0% cards generally kicks in after 12 to 20 months.
Ideally, you should pay off a significant portion of the debt in under 24 months. I strongly recommend a payment plan of no greater than 3-4 years.
Here’s where professional help can come into play. Sticking to a budget can be tough, so having a financial advisor or robo-advisor can keep you on track.
Having a good financial advisor is like having a great coach. Like dieting and exercise, budgeting can be much easier when you have the right help.
Here’s where Jurnex can help. You want to find a fee-only financial advisor who can help you create and stick to a budget. Some financial advisors offer free consultations to see whether they are a good match for you. Contact us and see whether we can help you too.
4. Is your current card higher than 5% APR?
If you already have a low-interest card, sticking with it might be worthwhile.
The downside to 0% refinancing is that some 0% APR credit cards have a balance transfer fee of 3-5%. This means that the company could charge you 3- 5% of the total balance to move the debt over, wiping out the interest savings.
Also, if you already have a low-interest credit card, the hassle of opening a new card may not be worth the trouble.
Having some credit cards is good, but too many can cause you to lose track.
If you answered “yes” to all 4 checklist questions, you should seriously consider refinancing your credit card debt with a 0% APR card.
What next after refinancing your credit card debt?
If you find that refinancing credit card debt is right for you, you should do your research about finding the right credit card. Many firms will send advertisements to your mail. Ignore these, because the best cards generally require your own research.
There are three main places to find good deals on credit cards.
- Local banks. Often, local banks have better deals than national outfits. They are often owned as a mutual, and so don’t have to pay profits to shareholders. Instead, they can work with smaller clients on more favorable terms.
- Online-only banks. These banks don’t have the fixed costs of maintaining a national network. Companies such as Discover can, therefore, offer better terms to their borrowers.
- Online only cards. Similar to online banks, online-only card issuers don’t have the burden of maintaining a national network. The savings can go straight to your pocket.
Most importantly, do your research. The card offers that show up in the mail tends to specialize in marketing, not low costs.
What other options for refinancing credit card debt?
Fortunately, there are other options if a 0% balance transfer is not for you.
1. Personal loan
You can use an unsecured personal loan from your local bank or credit union to help consolidate your credit card debt. The maximum annual percentage rate at a federal credit union is 18%.
Make sure you do your research. There are some reputable online lenders such as SoFi, and some P2P lenders like Prosper and Lending Club can also be good options. But non-federal loan rates can be as high as 36%. Many lenders also charge a 1-5% origination fee.
2. Home equity loan
If you own your home, you can take up a loan or line of credit on your home’s equity. These are known as a HELOC.
No matter large or small, equity in your house can help lower your borrowing rates.
Home equity loans typically have lower interest rates than unsecured loans. That’s because your house acts as collateral. This lowers the risk to the bank, allowing them to charge lower interest rates.
However, failure to pay could me able to will an you losing your house. A HELOC loan requires a lot of research, and we would highly you work with a good third-party financial expert to help analyze the potential pitfalls. These are not tools you should use without full
3. A 401(k) Loan
One final option for loaning money is to borrow against your 401(k) savings.
This type of loan typically does not involve a lender or evaluation of your credit history. Instead, these are more like the ability to access a portion of your retirement plan. Many plans will allow up to $50,000 or 50% of the assets whichever is less on a tax-free basis. You must then repay the money to return your plan to its original state.
What to do after you refinance credit card debt?
You need a good plan to repay debts
1. Aim to pay down your debt within 24 months.
Typically, you should allocate at least 15-20% of your after-tax salary to paying down credit card debt.
Most budgets will follow this pattern
- 50% on essentials (housing, transportation, food, clothing)
- 15% on savings (401k, IRA)
- 5% on an emergency fund (car repair, home repair, medical bills)
- 30% on everything else (entertainment, restaurant meals, travel)
If you have significant credit card debt, that last 30% should be diverted to paying down as much of it as possible. You don’t have to go hungry, but you may have to delay major travel plans until after your credit cards are paid off.
For those with extremely high credit card debt, you may also have to divert the 15% savings to paying it down too.
2. Divert essential spending into a separate account
In the finance world, there is a saying of “pay yourself first”. This means knowing how your cash will be spent.
One easy way is to budget 50% of your take-home pay and divert it into a separate account. Make sure you are spending it only on essential items. An additional 15% + 5% may be diverted to savings.
The remaining balance should have an auto-pay set up to the credit card debt. Any remaining balance can be spent as you please. You don’t have to go 24 months without a once-in-a-while restaurant meal.
3. Don’t make any new purchases on your credit card
It can be tempting to use your new 0% credit card for evil as well as good. Make sure you resist the temptation to spend money on the new card.
4. Finally, get debt free!
Once you have a good payment plan set up, it’s time to take action. As long as you stick to your budget, you should expect be debt-free according to plan. Consider selling items you no longer use, or taking side jobs earn additional money.
Conclusion
Should you refinance your credit card debt?
Refinancing credit card debt by rolling it onto a 0% card has significant advantages for those who qualify. While other loans require collateral or high-interest rates, a zero-percent card uses your credit score to qualify.
So if you meet the checklist requirements in this article, you should seriously consider refinancing your credit card debt with a 0% card. Just make sure you run through the numbers first. It’s a 30-minute process that can become the best investment of your life.
And if you need further help, feel free to contact us and see how we can help.
How can we help?
If you’re looking for advice about your own finances, you can contact us for more information. We at Jurnex Financial Advisors are asset managers who specializing in helping families and individuals navigate major life changes. If you want to get started in regaining confidence over your wealth, book a meeting with us today and see how we can help.
