How to Refinance Credit Card Debt
UPDATED: January 30, 2020
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There are two types of popular offers available to consumers who would like to refinance their credit card debt. The first option is the balance transfer. If you have credit cards, you can expect to receive plenty of offers from other credit card companies that want your business. You will receive offers for credit cards promising low to no interest if you sign up for a new card and transfer the existing balance to the new card.
The Home Equity Loan Option
The second most popular method of refinancing credit card debt is a home equity loan or HEL. If you have equity in your home, you may qualify for a home equity line of credit. A home equity line of credit has a lower interest rate, so you will end up paying less interest. You may use the proceeds from the HEL to pay down your debt. To determine which option is right for you, calculate how much you owe and jot down the rate for each debt. Consider hidden costs like annual fees and any over limit fees that may apply. Next, determine how much you can afford to pay. You should evaluate your total monthly payment (whether you include all of your debts in the consolidation or not) and determine whether you can afford it. Lastly, check with your credit card company to determine if any penalties apply. Some credit card companies may charge a fee for paying off balances in full, so it is important to obtain written confirmation outlining the exact amount of the fee and specific rules regarding how the fee will apply.
A home equity loan is still a popular option, but for many homeowners, this might not be an option at all. A home equity loan requires substantial equity in the home. For homeowners with significant equity in their homes, a HEL could be a good way to secure a decent rate. Unfortunately, many financial specialists advise against obtaining a home equity loan to consolidate credit card debt because doing so subjects your home to those debts. If you are unable to repay the loan, you could lose your home.
Examining Your Balance Transfer
Although balance transfers and home equity loans are both good options for refinancing credit card debt, they have a number of benefits and drawbacks. When evaluating balance transfers, you must examine the offer carefully. Make sure you have a clear understanding of all of fees that apply to each individual balance transfer transaction. Some banks impose a transaction fee for transferring credit card balances, so although the interest rate may be low, or zero, you will still end up paying to borrow the money.
One way to get an idea of exactly how much the credit is costing you, is to look at the Annual Percentage Rate (APR). This rate is the “real rate of interest” after all fees have been calculated as interest. You can use the APR to comparison shop. You should also make sure you fully understand the terms for that “great” rate the credit card company has promised you. In most cases, the rate is nothing more than a “teaser” rate. This means the rate will be low initially, but if you have not paid the balance within a certain time period, the rate goes up, often way up. The best way to avoid any surprises is to contact the credit card company and ask a representative how long the teaser or “introductory” rate applies.
Whether you decide to use a balance transfer or home equity loan to consolidate debt, the creditor must comply with the Truth-in-Lending Act. The Truth in Lending Act requires the creditor to provide you with a disclosure that states the APR for the loan or credit. It is important to review this information carefully and use it to compare the terms, conditions, and rates for any offers you may receive. If you have questions about the Truth in Lending Act or believe that a lender failed to comply with it, you should consult an attorney that specializes in finance or consumer law.