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Can I use a personal loan to refinance my credit card debt? | RateCity

Vidhu Bajaj avatar
Vidhu Bajaj
- 7 min read
Can I use a personal loan to refinance my credit card debt? | RateCity

If you are struggling with mounting credit card debt, one of the options you have is moving your debt into a personal loan with a lower interest rate. Consolidating your credit card balances into a single personal loan could also make it easier to manage your repayments and avoid paying annual card fees for multiple cards.

How can you refinance credit card debt?

You can refinance your credit card balances by taking out a personal loan with a competitive interest rate. Personal loans often have interest rates that are considerably lower than the average credit card interest rate. The difference in interest rates can translate into significant savings on your debt, which could help you pay it down faster if you are financially disciplined.

Apart from a lower interest rate, a personal loan also comes with a fixed term. This could encourage you to pay off your debts in a set timeframe by making the minimum repayments according to the loan schedule. With a credit card, it is sometimes tempting to just pay the minimum amount due and carry on while the balance continues to grow on your card. On the other hand, most personal loans have a fixed term of three to five years, and you must pay off your balance within this term. 

Even though a fixed term can be a motivating factor for some, there’s a flip side to refinancing your short term credit card debt into a personal loan with a much longer term of three to five years. By stretching debt over this length of time, you might end up paying more interest (despite a lower interest rate) than you would if you could pay off your debt in a shorter duration. Therefore, it’s worth looking beyond the interest rate and crunching the numbers to make sure refinancing your credit card debt is actually worth it. 

If you already have a home loan, it may be possible for you to consolidate your debts when you refinance your mortgage. By doing so, you’ll end up with a single ongoing repayment each month, which can simplify your finances considerably. Considering that the interest rate on a home loan is significantly lower than for a credit card and even a personal loan in many cases, consolidating your smaller debts into your home loan could drop the monthly cost of your debts significantly. However, even though this strategy could help make your smaller debts more affordable on a month-by-month basis, you could end up paying much more in interest charges over the entire term of the loan by stretching relatively small debts over a more extended period.

What are the benefits of refinancing credit card debt?

One of the biggest benefits of refinancing your credit card debt into a personal loan with a lower interest rate is reducing the amount you pay in interest charges. A personal loan also gives you a longer time to pay down your debts, which could help you get your financial situation back on track through better financial discipline and budgeting. Depending on your circumstances, you may benefit from refinancing your debt in other ways, such as: 

Easy budgeting and tracking

Juggling multiple credit card debts can be stressful. You may find it easier to budget and manage your bills by refinancing your debts into a single personal loan. Having a single repayment to make every month also reduces your chances of missing a repayment date.

Save on annual fees

If you are struggling with credit card debt, it could help you pause your credit card spending and focus on busting your debt instead. If you are no longer using a credit card, you may consider moving your debt to a lower interest rate personal loan and closing unused credit accounts to save on annual fees. 

However, it’s good to know that keeping existing accounts could sometimes help your credit rating by keeping the average age of your account high. Therefore, it’s essential to weigh the pros and cons before deciding to close an existing credit card account, as the payment history associated with the card will also be removed from your file. 

Improved credit score

When you apply for a personal loan, the credit provider will perform a hard inquiry on your file before approving your application. This may impact your credit score temporarily. However, if the new loan helps you to get ahead of your debts, the benefits could outweigh any negative impact on your credit score in the long run.

Is it a good idea to refinance your credit card debt?

If you are going through temporary financial difficulties, you may decide to make the minimum repayments on your credit card for a few months. While this strategy could help you protect your credit score, it’ll barely make a difference to your balance owing, which will only increase as it accumulates interest over time. As the interest rate on credit cards is generally high, only making the minimum payments on your card could lead you to accumulate substantial debt, increasing the chances of a payment default that will stay on your credit report for years. 

If you think you cannot make payments on your credit card, it’s important to take timely action by getting in touch with a financial counsellor or looking for debt consolidation options, like a low interest rate personal loan that could give you more time to clear your debts. However, do the maths in advance to figure out whether you’ll be able to afford the repayments on a personal loan before applying for one. If you find yourself stretched too thin financially, you may consider getting in touch with your credit card provider and seeking hardship assistance to get your finances back on track.

Another thing that’s important to check before considering a personal loan for refinancing is your credit score. You’ll generally require an excellent credit score to qualify for a personal loan with a competitive interest rate. 

It’s also worth considering the cost of the loan to you. A debt consolidation personal loan isn’t always the cheapest option available. One of the other options you may want to consider is a balance transfer credit card that lets you transfer your credit card balances to a new card with a low (often zero) interest rate for a promotional period of up to two years. 

How to get the most out of a credit card refinance

  • Sometimes, when you refinance your credit card debt to a personal loan, it is possible to borrow an amount that’s more than your existing debt. However, this could increase your overall debt, defeating the whole purpose of refinancing to get ahead of your existing debts. Therefore, unless you really need the extra money, It’s advisable to limit your borrowing to the amount of your existing debts.

  • Try to avoid using your credit card after you have paid it off with a personal loan. If you continue using the card, you’ll end up paying additional credit bills, as well as the repayment amount on your personal loan, which could lead to financial difficulties if you are already battling with credit.

  • You can use a personal loan to pay off your credit card balances, but it’s worth checking any establishment fees you may be liable for when setting up the loan. By weighing up the fees you may pay with the money you may save in interest through refinancing, it can make it easier to decide the right course of action for your financial situation.

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Product database updated 21 May, 2024

This article was reviewed by Personal Finance Editor Georgia Brown before it was published as part of RateCity's Fact Check process.