Most Americans face a tough reality. Credit card spending is at an all-time high, and more and more of us are finding ourselves stuck in a financial debt prison that greatly affects our quality of life and no easy way to manage our debt.
We owe a staggering $1.04 trillion in credit card debt, according to the Federal Reserve. And, on average, each of us carries $6,354 of credit card debt.
Here’s what can happen when you’re mired in credit card debt:
- Your credit score suffers, affecting your ability to get good rates on loans for cars and mortgages.
- Emergencies become more costly and harder to manage, as credit card debt payments drain money that could be used toward building an emergency fund.
- You have less saved up for retirement, forcing you to work longer before you can retire.
- As your debt piles up, you may be forced to go further into debt to pay for everyday needs such as gas and groceries. Debt can quickly spiral out of control.
But there are solutions. Instead of paying off debt through minimum payments — which can take an excessively long time — consider refinancing as an option to help you get out of debt faster.
What is credit card debt refinancing?
In short, credit card debt refinancing, sometimes called debt consolidation, is when you combine your debts into one bill that, in the best-case scenario, you can pay off more quickly than making separate payments to each card.
Refinancing credit card debt is a little more complicated than that, though, as there are multiple options to consider, each with its upsides and downsides.
Know when to consolidate credit card debt
You want to consolidate credit card debt when you’re carrying a high balance with a high interest rate that you know you can’t pay off right away. The benefit of credit card debt refinancing becomes especially relevant if you’re carrying multiple high balances with high interest rates.
Basically, the more high-interest debt you have, the longer it’s going to take to pay off, and debt consolidation is all about combining debt to help you pay it off faster.
Know your refinancing options
There are two main ways to refinance credit card debt: a balance transfer credit card or a credit card refinancing loan. Both are easy to apply for, and thousands of Americans rely on them every year to help them get out of credit card debt.
What are balance transfer credit cards?
Balance transfer credit cards are designed with debt consolidation in mind. Basically, you transfer all credit card balances you have onto it.
These cards typically offer introductory 0 percent or low interest rate promotional periods to help you get out of debt quickly by saving thousands of dollars in interest within the promo period.
These promotional periods typically last between 12 and 18 months, with some lasting as long as 20 months, after which point the interest rate goes up, usually to a standard rate.
So, with that in mind, you want to make sure you can pay off the total balance before the promo period ends to avoid having to pay higher interest.
This refinancing option may be especially beneficial if you have multiple credit card debt payments: Managing only one credit card payment each month is much easier.
What are credit card refinancing loans?
Most credit card refinancing loans offer debt consolidation with the advantages of fixed monthly payments, interest rates and payment periods. This makes them attractive to those who want to save money on interest, pay off credit card debt quickly, and keep track of payments.
The personal loan
By far, this is the most popular loan. Available through most banks, credit unions and online vendors, usually to debtors with moderate to high credit scores, personal loans are unsecured, which means you don’t have to put up your assets for collateral.
However, you still have to make payments on time. If you don’t, you may face serious consequences.
The 401(k) loan
When you borrow money from your 401(k), or employer-sponsored retirement savings, you are borrowing from yourself, so you want to make sure you pay it back on time; otherwise, you will have less money for retirement. This type of loan doesn’t involve a lender or credit history check.
The home equity loan
Think of this like a second mortgage — you take out a loan against your home equity.
This loan is secured, meaning you put up your house as collateral, which makes the loan very risky. You could lose your house if you fail to make payments.
These loans typically take the longest amount of time to pay back.
What credit card debt refinancing option is best for you?
To decide which refinancing option is best for you, take time to assess your credit card debt situation:
- How much credit card debt do you have?
- How high are your interest rates?
- Can you pay it off within the promo period of a balance transfer credit card, or will you need much longer?
- Do you have a high-enough credit score for a personal loan?
A big part of choosing the right credit card debt refinancing option is knowing how much money you can manage to put toward monthly payments.
Don’t take out a loan with a shorter payment period if you can’t manage the heftier monthly payments. You’ll need to create a new budget.
Pro tip! Gather this month’s pay stubs, receipts and bills. Add up each group and record your totals in a budget sheet.
Add the totals of your receipts and bills and subtract that amount from the pay stubs total. The answer is your monthly savings.
Do you have enough monthly savings to make high payments or low payments? If you can make high payments, consider a balance transfer credit card. If you can only make low payments, a personal loan may be better for you.
What mistakes should you avoid when making payments?
While you’re paying off balance transfers or loans, avoid the following mistakes that can prevent debtors from getting out of credit card debt.
Failing to prioritize debt payments
If you don’t prioritize debt payments each month, you risk running out of money before making your payments.
Instead, if you can, set aside the money for your debt payments as soon as you receive your first paycheck of the month. But keep track of where you put that money.
Not tracking payment progress
Tracking payment progress goes a long way toward keeping yourself motivated. Without motivation to pay off your debt, it’s easy to fall off track, miss payments, and fall further behind.
Look at your account balances each month, and track how many more months you need to pay them off.
Ignoring why you’re in debt
Many Americans have self-inflicted reasons why they’re in debt, such as excessive spending on extras such as hobbies. If there’s something under your control that’s driving you into debt, make a plan to reduce that spending. Find cheaper hobbies.
Make spending on yourself an occasional small reward for hard work, paying down debt, and putting money into savings.
How can you pay off credit card debt quickly without refinancing?
For some, refinancing credit card debt isn’t the best option—or isn’t an option at all. Typical obstacles include poor credit history (balance transfers and refinancing loans often require credit checks) and not having enough debt to make these options worthwhile.
Obstacles or not, you can still effectively manage your credit card debt without refinancing. There are two popular methods:
- Pay off debt with the highest interest first before moving on to the debt with the second highest, and so forth. This method saves you time and money by decreasing the total amount of interest you have to pay.
- Pay off the smallest debts first before moving on to the bigger ones. It’s easier to feel motivated to keep making payments as you tackle small debts quickly.
How do you handle credit card debt in the future?
Out of credit card debt? Congrats, but don’t relax. Establish good habits that will keep you from falling back into the pit. Here’s how to avoid credit card debt in the future.
Get a low-interest credit card
Once you pay off your credit card debt, swap out your credit card for one with a lower interest rate. The lower the amount of interest you have to pay across your credit accounts, the easier it is to pay off balances in full each month, preventing further debt.
Keep personal spending to a minimum.
Don’t go crazy buying stuff you don’t need. This is the ultimate exercise in self-control. Buy only what you need, and make sure you have enough available cash in your debit accounts to pay for them.
The bottom line on managing credit card debt
It can be a long road to financial freedom when you’ve got piles of credit card debt sitting on your lap. If you’re like most Americans, you have some form of credit card debt to pay off—and the longer you wait to pay it off, the worse it gets.
Thankfully, most roads have shortcuts, and the road to financial freedom is no exception. Consider refinancing credit card debt to get you closer to a better, stress-free life.