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7 things to know about refinancing credit card debt

Updated: May 04, 2015 10:08 AM
© George Doyle / Valueline / Thinkstock © George Doyle / Valueline / Thinkstock

By Andrew Housser


Many people find themselves burdened with credit card debt at some point in their lives. It might happen because of unexpected home expenses, large medical bills or because they were caught off guard in an emergency, without a financial cushion. For some people, spending beyond their means left them with big bills. Sometimes, new college grads find themselves owing.


No matter how it happens, the challenge is getting out of debt. The idea of refinancing credit card debt into a fixed, amortizing installment loan might be appealing. How do you know if this option is right for you? Ask yourself these seven questions.

1. Are you juggling multiple payments at varying interest rates?

A personal loan that refinances multiple bills has several advantages. It has just one monthly payment, with one due date and one interest rate, which can relieve the stress of multiple due dates and amounts. For borrowers with fair-to-good credit scores (often in the 600-700 range), it can make sense.


2. Are your credit card interest rates high?

Many credit cards carry interest rates of 15-25 percent. A personal debt refinance loan can lower the total interest rate by 2 to 4 percentage points, which can bring significant savings. For example, if you repaid $10,000 over 60 months at a 20 percent interest rate, you would pay $265 per month. The interest fees you paid would total $5,894. If you could lower the interest rate to 16 percent with a personal loan, over the same 60-month period, you would pay $243 a month and save more than $1,300 in interest expense.


3. Will you be able to pay off your credit cards in a year or less?

If you will be able to repay your existing debt in a year or sooner, you probably do not need to refinance debts with a personal loan. Personal loans usually will charge an origination fee of anywhere between 1 percent and 5 percent of the loan amount, so you will need to take that into account when calculating your overall interest savings. If you anticipate repayment taking longer than a year, you might save considerably on interest fees with a personal loan, even after paying the origination fee.


4. Do you want an achievable schedule for getting out of debt?

Most debt refinance loans are issued for a period of 36 to 60 months (three to five years). These have a set monthly payment and a set timeline for repayment. This means you can anticipate and look forward to when your debt will be paid off (as long as you stick to the payment schedule). Revolving debt, such as credit cards, lets you get away with not paying down your debt, so even if you plan on paying off your credit card debt in three to five years, you may find the payoff date slipping further and further into the future. A personal loan helps promote financial discipline, as the required payments necessitate that you pay down the debt in the allotted timeframe. The value of this behavioral nudge is hard to quantify, but depending on your self-discipline, it may mean that the interest savings from a personal loan will be much greater than the calculation done in No. 2 above.


5. Are you still adding to your debt?

If you are continuing to add to your debt, be careful about applying for a personal loan. If you refinance your debt, but then continue using credit cards, you could wind up with more debt than you began with. Personal debt consolidation loans are best for people who are ready to pay off all debt.


6. Are you unable to qualify for a bank loan?

Following the Great Recession several years ago, many banks and credit unions tightened their lending requirements. As a result, some consumers find it hard to get a personal loan. Fortunately, the marketplace has responded with products to help people whose credit scores might not reflect their repayment capabilities. Companies known as peer-to-peer lenders, as well as other independent lenders, can be helpful. Consider the products offered by lenders such as
FreedomPlus, Prosper or Lending Club. Some of these companies use different criteria to evaluate how likely a person is to repay their loan. These different criteria mean it might be possible to obtain a debt refinance loan even if a bank has denied you credit.

7. Are you in serious financial hardship?

If you are in such severe financial hardship that you cannot make minimum payments on your current debt, a loan might not work for you. You also might not qualify for a personal loan. Instead, consider other help, such as debt negotiation (settlement) or credit counseling.

For many people, refinancing credit card debt into a personal installment loan can be a smart decision. It can bring peace of mind, predictable payments, lower total interest costs and confidence that the debt will end. This kind of loan is not the same as debt consolidation with a credit counseling company or other agency. You remain responsible for making payments, and the company does not negotiate with your creditors. The debt solution that is right for you depends on your individual situation.



Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC providing comprehensive consumer credit advocacy and debt relief services. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
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