To refinance credit card debt involves securing a new loan that will pay your credit card balances in full. While there are several methods of refinancing credit card debt, the most common choices include:
Home Equity Loan: With a home equity loan, you use your home's equity as collateral to secure a loan of a set dollar value. Typically, in order to qualify for a home equity loan, you must have at least 25% equity.
HELOC (Home Equity Line of Credit): As with a home equity loan, a HELOC uses your home's equity as collateral. Similar to credit cards, HELOCs are generally approved for an upper limit, and then drawn on in periodic installments. Like credit cards, you pay interest on the balance that is used.
Cash Out Home Refinance: With this option, you secure a new home loan that includes the balance of your original mortgage plus the amount of cash received. Cash out home refinances require at least 25% equity, 75% of which can be borrowed against.
Balance Transfer: With a balance transfer, you transfer the balance of high interest credit card debt to a card with a lower APR.
Regardless of which method you choose, there are some basic steps you should follow when refinancing your credit cards:
Inventory your debt. Make a detailed list of the balances and interest rates of all credit cards, including store cards, gas cards, and major credit cards. If you're currently paying a special introductory rate, make a note of when the promotional period ends.
Decide which credit cards to refinance. Will you be refinancing all of your credit cards, or just those with high APRs? If you have a credit card with 0-5% APR, it may be hard to top this rate with a refinance. Total the balances to determine the dollar value you'll need.
Look for a better alternative. Consider your options for refinancing, and look for a loan alternative that suits your personal financial scenario. Rates, fees, closing costs, and potential penalties vary from lender to lender, so shop around to find the most favorable alternative.
Keep in mind that refinancing credit card debt is only a band aid solution to a much bigger problem. If the majority of your credit card debt is a result of living beyond your means, you'll also need to adopt more responsible spending habits to avoid racking up future debt.