Fed Rate Cuts: Should You Refinance Your Credit Card Debt?

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Last updated on November 3rd, 2020

One of the biggest financial news stories from the coronavirus pandemic is the historically low Prime Rate. The figure, which is the percentage at which the Fed loans money to its most esteemed clients, currently sits at 3.25%. More importantly, the low Prime Rate looks here to stay for a considerable while. Because of the Federal Reserve cuts, should you take advantage and consider refinancing your credit card debt?

Why Refinance Your Credit Cards?

Most credit cards come with a variable APR (annual percentage rate). The APR is the rate at which a credit card account accrues interest over the year. Card issuers base the APR on both the Prime Rate and the creditworthiness of an applicant.

Your creditworthiness can significantly alter your APR. Excellent credit scores currently average a 14.5% APR, and average credit scores weigh in at an APR of 26.2%, according to the BestCards Average APR Guide. This means that even if your credit improves significantly, you might still have the same high-interest rates. In cases like these, refinancing your card debt make sense.

Is Now the Right Time to Refinance Credit Cards?

An easy option for reducing your credit card payments is to contact your bank or lender and ask for a lower rate. This practice is much easier for those with a long history with the bank, however. Regardless, cardholders need to call their lender and negotiate a lower rate if they wish to get one. Be prepared to discuss your payment history, your card usage, and to explain why you think you deserve a lower APR.

For those with newer credit card accounts, securing a better rate might be tricky. Fortunately, there are other ways to refinance your credit cards. The next most practical approach is through a balance transfer. Using balance transfers allows you to take existing card balances and transfer them to another card – ideally one at a lower interest rate. You can then pay off that debt much quicker – and cheaper than before.

Related Article: Should You Consider a Balance Transfer During COVID-19?

What’s the Best Way to Refinance Credit Card Debt?

Balance transfer cards are a popular option for combining card debts and repaying them at a lower APR. Many balance transfer cards come with a 0% APR introductory offer between 3 and 18 months. Once the zero interest period ends, however, the average APR for one of these cards is approximately 16.5%.

This average rate isn’t much better than most other credit cards, meaning unless you can pay the full balance off during the promotional period, you might be better off with another credit card.

Hybrid installment credit cards, like the Upgrade Card, are another option that provides a sensible solution to the issue of refinancing credit card debt. Studies show that credit cards/ installment loan products, like the Upgrade Card, can reduce the time – and money – you need to repay a credit card balance.

The Upgrade Card works by providing up to $20,000 in initial credit, just like a typical credit card. Rather uniquely, however, you can also transfer the credit line into existing accounts to pay off balances, consolidating them into one small payment throughout 12 to 60 months. Where Upgrade differs from credit cards, however, is that interest rates start as low as 6.99% – more than 10% lower than the average balance transfer credit card.

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Rates & Fees
  • Regular Purchase APR: 14.99%-29.99% variable based on creditworthiness and the Prime Rate
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FAQs About Refinancing Your Credit Cards

Refinancing or consolidating your credit card debt can be confusing. Here are practical answers to some of the most frequently asked questions (FAQs) about credit card refinancing:

Does consolidating cards hurt your credit score?

  • Combining multiple credit accounts into one payment will raise your credit score in the short term. This rise is caused by a higher credit utilization rate on the balance transfer or hybrid credit card. Over time, however, paying down balances will raise your credit score. Plus, on-time payments are a more significant benefit than late payments due to high-interest charges.

Are refinancing and debt consolidation the same thing?

  • Not entirely. Debt consolidation is combining multiple balances into one easy payment. Debt refinancing is changing the loan terms to lock in a lower interest rate. With cards like balance transfer cards or the Upgrade Card, you are mostly doing the same thing – paying down debts and combining them at a lower interest rate.

Can you pay off credit card debt with a personal loan?

  • You can take out a personal loan to pay off credit card debt. In some cases, a personal loan may offer a lower APR than most 0% APR cards from leading card issuers. Some popular personal loan options include OppLoans, Jora Credit, or SuperMoney.

Should I refinance my credit cards?

  • If you find yourself struggling to pay your credit card bill every month, the answer is yes. Refinancing or consolidating credit card debt can be as easy as applying for something like the Upgrade Card and transferring over the balance. Then just pay one smaller bill each month for the duration of the loan terms, and you’ll eventually be credit card debt-free.

Related Article: How to Manage Credit Card Payments During the Coronavirus

About: Cory
Cory Santos

Cory is BestCards.com's "Jack of all trades" and resident credit expert, covering all facets of the credit card space. Cory holds academic degrees in both the U.S. and U.K. In addition to credit cards, Cory finds that jogging, cats, and memes are essential parts of a balanced day.

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