We all have credit cards. Many of us use them, but we do not know the best way to do so. According to USA Today, Americans owe over $1 trillion dollars in credit card debt and that number continues to increase. USA Today states that about 40 percent of those who use credit cards are able to pay the balance due every month.
The other 60 percent have a staggering amount of credit card debt. There are tons of reasons why people owe so much in credit card debt. We will touch on some of those reasons as you continue reading. We are also going to talk about your options when you find yourself drowning in credit card debt, including credit card refinancing. Keep reading to find out everything you need to know about credit card refinancing.
What Does It Mean To Refinance Credit Cards?
Credit card refinancing is when you choose to take your debt from one or many credit cards and transfer it to another credit card. The overall goal is to save money on the interest you are paying on your current credit card debt. Typically, when you transfer money from one credit card to another, the new card gives you 0 percent interest on the transferred balance. Credit card refinancing can save you money in the long run. It helps decrease the amount of money you have to pay each month. If the interest does not build, you have an easier time of paying off your credit card debt.
Another way to refinance your credit cards is to get a refinancing loan. This is an actual personal loan that you use to refinance your debt. As with anything else, there are positives and negatives to obtaining a personal loan to consolidate debt. Some of these refinance options can be handled online with online applications. Today, it is much easier to file for credit cards and loans online with online card shops.
Bank Gives You a Credit Limit
The bank gives you a credit limit and you cannot borrow beyond that limit. You can pay off the amount you borrow by a specific date each month. If you cannot pay the full amount, there is a minimum payment you must make. Any amount that you do not pay is subject to interest charges. If you do not make the minimum payment or make the payment late, the bank assess a fee. Only paying the minimum amount or getting hit with a lot of fees puts you in a dangerous place. You may run the risk of drowning in debt and need credit card refinancing. Keep reading for more about that.
When you use the credit card, that decreases the amount available to you. As you pay off the amount you owe, that increases the amount available to you. I will give you an example to illustrate how it works.
Your credit limit is $2,000. You purchased $500 worth of items. Your credit limit is currently $1,500. Your minimum monthly payment is $25. You owe $500, but can choose to only pay $25. If you only pay $25, you still owe $475 and will pay interest on that amount. If you pay $500, you owe $0 interest. If you pay $500, your available credit goes up to $2,000. If you only pay $25, your available credit is $1,575.
70% of the United States population carries a credit card, with 34% of Americans carrying 3 or more cards.
How Does Interest Work On A Credit Card?
I mentioned above that if you do not pay the balance in full each month on your credit card, you have to pay interest charges. That is typically how credit cards work. Some credit cards offer specials where you can get 0 percent interest for a set period of time. I am not talking about credit cards offering special deals. I am talking about a typical credit card interest scenario. It is important to understand how an APR credit card works.
For a typical credit card, they offer a grace period which is a period of about 15 to 30 days between when you purchase items and your monthly due date. Your due date is the same date every month. That means, if you pay off your credit card by your monthly due date, you do not have to pay interest. Interest is calculated on the balance you owe. Every credit card has a different interest rate they charge to your credit card. The initial rate they offer you is based on your credit score. Some credit cards have interest rates as high as 20 percent.
Let’s Take an Example
Let me show you what that looks like with real numbers. This is an example, the numbers may not be what you really see with your credit card.
Your credit card has available credit of $5,000. You have charged $2,000. Your available credit is $3,000. Your minimum monthly payment is $75. You can pay $500. Your new available credit is $3,200.
However, you must consider the interest. Your credit card charges you 10 percent interest. That means you are charged 15.9 percent interest on $1,500 since that is the balance that is left. This is how you determine how much interest you owe. There are a few calculations that take place when determining interest.
You take your interest rate (15 percent or 0.1599) and divide that by the number of days (365) in the year:
0.1599 / 365 = a 0.00044 daily periodic rate
You multiple the daily rate (0.00044) by your daily balance ($1,500):
0.00044 x $1,500 = $0.66
- Lastly, multiply the number above by the days in your billing cycle (30):
$0.66 x 30 = $19.80 interest charged for this billing cycle
The bottom line is not paying off your full balance causes you to accrue interest and you pay more money. Over time, this amount adds up and may cause you to have such a high amount of debt, you may consider credit card refinancing.
What Are The Benefits of Credit Cards?
First, I am going to focus on the good things about credit cards. They can help you build your credit. If you are young, or do not have much in the way of credit, a credit card is a great way to begin to build your credit. You should be mindful that the only way you can build good credit is to use a credit card wisely and pay it off every month. Credit cards also provide revolving credit for you. You can keep a credit card forever. As long as you pay the bill timely and more than the minimum amount, you always have credit available to you. You can keep this for times when you have emergency expenses.
Credit cards offer you convenience because you are able to purchase something today even though you will not have the money for it until next week when you get paid. Credit cards provide you the opportunity to purchase the item when you need or want it, even when you do not have the money. Some credit cards offer rewards and incentives, and if used properly, you can actually earn money by using them. You can receive points that allow you reduced prices for airline tickets, dinner, or other items you buy. This translates directly to savings for you.
You can also use them to do credit card refinancing. Some credit cards offer special deals if you transfer the balance of a high interest credit card to a new lower interest one. This can save you money on interest charges, especially if you have 0 percent interest for a set period of time on balance transfers.
What Are The Downsides of Credit Cards?
I would like to touch on the negatives to credit cards. They are another bill. Whenever you use your credit card, you still have to pay for your purchase. That becomes a bill at the end of the month. It is easy not to think about at the time of purchase because you do not have to pay any money in the moment. You will have to pay for it, eventually. There is that pesky interest that I keep mentioning. I keep bringing it up because it is important for you to remember. If you do not pay the bill in full, you have to pay interest on your daily balance. This is something you can avoid, but you must pay the bill in full to do so.
One thing I have touched on only a little bit is your credit score and how credit cards can impact it. Using credit cards improperly can cause your credit score to decrease. When you use credit cards properly, they can help you build your credit. The opposite of that is also true, improper use of credit cards can negatively impact your credit score. Late and missed payments are the most common ways credit scores are negatively impacted. This is true for loans, general bills, and credit card payments. Just using your credit cards can also impact your credit.
The higher your credit card balance, the more credit you are using and this is a negative mark for your credit. Also, the more credit you use the higher your debt to income ratio becomes which also negatively impacts your credit. Carrying a high amount of credit card debt may also put you in a position where you may need to consider credit card refinancing.
What Else Should I Know About Credit Cards?
As I have highlighted above, credit cards are an amazing tool at your disposal. There is a simple credit card that is simple to use. However, you have to use them responsibly. Credit cards can be a constant source of temptation for you. If you know that you have credit available on your credit card, you might feel compelled to make purchases. You may not need these items, or possibly cannot even afford these items, but because you have available credit, you purchase the item anyway.
This is can lead you down a dangerous path of quickly getting over your head with credit card debt. If you begin to feel like your credit card debt is out of control, you may want to consider credit card refinancing. You have to be aware of your own spending habits and will power when it comes to credit cards. There is no one to police you, but yourself.
Another consideration is identity theft. It is much easier with credit cards, especially with online purchasing. You probably have heard that gas pumps are the worse with stealing credit card information. Gas providers try to stay ahead of those who are out to do harm, but they always seem to be one step ahead of the technology used to prevent them from stealing information.
Are There Options Other Than Using Credit Cards?
When it comes to credit card debt it is especially important that you remember even though you are not paying money upfront, you still have to pay. If you know that you may not have the best control over your impulse to shop if you have credit cards, you might want to think of alternatives. You can open a savings account and put money in there for extra things you might like to have. Some people call this a rainy day fund. It could be for vacation, emergencies, or just an occasional shopping spree.
It is money set aside for just that purpose, so you are not spending money needed for bills. You are not raking up credit card debt. This way you do not have to worry about negative implications to your credit rating. You will not have to worry about bills coming in at the end of the month.
Saving money for your needs is a great alternative to getting yourself further into debt. If you have ever felt like you were drowning in debt, you know what a terrible feeling that is. Anything that you can do to prevent yourself from getting into the downward debt spiral, is a smart financial move. If you have been deep in debt previously, you want to do everything you can to prevent that from happening again. If you are currently in debt, you want to get out of it as soon as you can. You may feel like it is impossible for you to save money when you are working hard to pay your current bills. This is the time when you may consider credit card refinancing.
What Is Bill Consolidation?
I mentioned a little bit about debt and bill consolidation above, but I want to dig in a little deeper. The major difference between credit card refinancing and bill consolidation is what debt is being paid. Bill consolidation does not just have to be credit card debt. It can be any type of debt that you have. It is consolidating all of your debt into one manageable payment. Often, you are paying off high interest debt with a lower interest loan or credit card. When you are considering consolidating debt, you need to understand what components make up your debt. This helps you determine which debts you want to consolidate and how to do that.
In the following sections, I touch on the positives and negatives about credit card refinancing. It is important to fully understand the pros and cons of consolidation when you are considering it. When you consolidate your debts, you take on more debt initially. No matter if you obtain a loan to pay off your debt, or open a new credit card to consolidate credit card debt, you are adding to your debt to income ratio.
What Are The Benefits to Bill Consolidation?
There are many obvious advantages to consolidating your debt. The biggest one is taking all of your debt with many different payments and consolidating into one payment. This allows you to focus on paying off one payment instead of many different payments. This also allows you to focus on paying off your debt faster. You know exactly what amount you have to pay each month. It does not change based on usage like a credit card does. The interest rate is fixed and does not change based on how much money you pay each month.
Credit card refinancing may also be able to give you a lower interest rate. This is not always the case. However, when it is, it can significantly lower the amount of money you pay over time. When you have a lower interest rate, it decreases the amount of extra money you are paying on top of the actual money borrowed. When you think of interest, you should think of it as a fee the bank, or lender, charges you to borrow money from them.
What Are The Negatives of Bill Consolidation?
There are some negatives that you should consider with credit card refinancing. One major thing you should be mindful about is the interest rate. You should make sure that the interest rate you are given during consolidation is actually lower than what you are paying now. If you end up paying a higher interest rate, you may end up paying more money. When you consolidate your credit, you may have a long repayment time frame. It may take you up to five years to pay off the consolidated amount. Keep in mind that it may take you longer to pay off your debt if you do not consolidate it.
Unlike a loan, there is no time limit to how long it takes you to pay off your credit card debt. In fact, if you only pay the minimum, it could take you over 10 years to pay off credit card debt.
Another major negative to consolidation is you feel like you have managed your debt. Since you have consolidated to one payment, you may feel like you have paid off more debt than you really have. You still have the same considerable amount of debt. You just have one payment. You need to be mindful that you do not get yourself back into the cycle of credit card debt. You actually might want to consider cutting up all but one credit card. Then you might want to hide that credit card so you have it for emergency purposes only.
How Does My Credit Impact Debt Consolidation?
I have not talked too much about your credit score before now, so let me give you some helpful information. Your credit score directly impacts the interest rate you receive during credit card refinancing. That in turn becomes a direct impact on the money you pay each month. Your credit score may seem like it is not that important, but it is a huge deal. Your credit score is prominently displayed on your credit report. Your credit report is a detailed listing of all of your activities involving credit. It shows your payment history, how much debt you have and how you use it.
It shows the age of your credit. It shows all of your late or missed payments. It even shows loans on which you have defaulted. All of these items listed on your credit report impact your credit score. It is built, or destroyed over time and gives lenders an indication of your credit worthiness. It takes hard work to build your credit score. However, it only takes one or two missed payments to send it downward.
I have given you a lot of basic information about credit card refinancing. It is easy to feel like you have no control when you are buried in debt. There are websites that help you focus on getting your debt under control. They can help provide guidance for credit card refinancing so you can feel like you are making sound decisions. When making financial decisions, it is best to have all the information and make rational decisions. This will go a long way to helping you become debt free.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.