Does It Make Sense To Refinance Credit Card Debt?
Credit Card Debt Refinancing: Facts And Alternatives
Debt consolidation loans can be hard to come by these days. Even so, to refinance credit card debt, depending on your situation, remains an important technique for helping to reduce borrowing costs and organize debts. Let’s look at the different ways of refinancing credit card debt:
Unsecured or Personal Loans
If you do not own a home, a choice to refinance credit card debt is the unsecured loan, also known as a signature loan. These loans are not secured by any collateral. Because of this, they will have a higher interest rate which may cost you more in the long run. Unsecured loans are harder to qualify for since there is no surety for the lender. The interest rate is determined by what the lender feels his risk is in providing the signature loan, which is a combination of many factors including the loan amount and your credit rating.
Home Equity or Secured Loans
Home equity loans are usually the next option for refinancing credit card debt. These loans are obtained by borrowing against the equitable portion of your home’s value. This gives you the advantage of lower interest rates than most other options. Plus, interest paid on home equity loans is generally tax deductible. When borrowing against your home equity, be sure to remember that you would be converting an unsecured loan into a secure one and defaulting on your home equity loan can result in losing your home.
Moreover, statistics reveal that 65 to 70% of people who borrow money to pay off credit card debt end up with a new debt load within 2 years.
Debt Consolidation Programs
Debt consolidation programs do involve a loan, basically the purpose of these programs is to combine all your debts into one big debt. Rather than paying several monthly bills, you pay one large monthly bill, which could be less or more than what you were paying before and may take longer to repay. Debt consolidation programs are available through consumer credit counseling agencies such as Care One Credit. .
There are additional methods you can use to refinance credit card debt without taking out a loan:
Credit Card Balance Transfers
Use your lower-interest credit cards for debt consolidation. List your credit card balances, interest rates, and credit limits. Act to move balances to the cards with the lowest interest rates to the extent their credit limits will allow. Be sure to monitor this monthly, since both interest rates and credit limits are subject to change.
Prioritize Payments by Credit Card Terms
If the credit limits on your low-interest cards don’t allow you to consolidate all your credit card debt there, at least target the cards with the highest rates for the largest monthly payments. Be sure to keep up with the minimum payments on all your cards, so you don’t damage your credit rating and blow the lower interest rates on your other cards.
Debt Management Plans
Debt management programs are also available through consumer credit counseling services (CCCS). The agency negotiates with your creditors to try to lower your interest rates and eliminate late fees. The first step in this program, if you are dealing with a legitimate and honest CCCS, should be a counseling meeting with you and a counselor to determine if a DMP is needed.
It is critically important that you proceed with caution before signing up for this type of program, since a lot of these companies have been under fire lately for blatantly ripping off consumers.
Cascading Debt Elimination System
Alternatively, if you need motivation and want to pay off each debt faster, you might want to check out the cascading debt elimination system, which entails paying off the debt with the smallest balance first.
These methods won’t solve your problems all in one move, but they are alternatives to getting a loan to refinance your credit card bills and if you follow any of these systems diligently, over time you will find yourself gravitating more and more toward the reduction of your debt level.