A credit card is a handy instrument to have in your pocket. You do not feel short of funds with a credit card in hand. It provides you with an option of buying now and repaying later. It works when you use your credit card wisely. Imprudent use of your credit card can land you into an undesirable financial condition. We shall discuss the implications of reckless use of the credit card and the solutions to the problem.
Imprudent use of the credit card
Every credit card comes with a beautiful facility like an interest-free period. You can avail this benefit if you pay your entire credit bill before its due date. Circumstances can arise when you might not be in a position to pay the whole outstanding amount. The credit card mechanism is such that you can choose to pay a minimum of 5% of the unpaid bill amount before the due date and carry forward the balance to the subsequent month. Under such circumstances, each expense you make on the card attracts interest @ APR (Annual Percentage Rate). This rate can go up to 36% per annum.
This debt can add over time and push you into a debt trap. It affects your credit rating as your repayment record suffers and the credit utilization limit on your credit card increases. The earlier you get out of the financial mess, the better it is for you.
The Solution to the Problem
Credit card refinancing is an effective solution to this issue. You can also refer to it as debt consolidation, especially if you have multiple credit cards. Let us look at this concept and understand how it works. We shall also discuss the risks and rewards associated with credit card refinancing. To know more about credit cards click on the following link https://blog.cred.club/2019/05/09/cover-your-credit-card-basics-here/.
Credit Card Refinancing
Another name for Credit Card Refinancing in financial circles is the Balance Transfer facility. The easiest way to refinance your credit card debt is to apply for a balance transfer credit card and shift your debt balances to the new card. Many banks and credit card issuers provide such credit card refinancing facilities by offering 0% APR credit cards to its valuable clients. This facility provides you with an excellent opportunity to come out of the debt trap and bring your finances on the right track.
How does credit card refinancing work?
This facility is available to borrowers with good credit scores to enable them to come out of a temporary financial instability. Banks provide a 0% APR for a limited period, say six months whereby you get the benefit to repay your credit card dues in interest-free installments. You can transfer balances from the higher APR credit card to the new balance transfer credit card. This facility has its advantages and disadvantages. Let us look at the risks and rewards of using credit card refinancing to consolidate your debt.
Rewards of Credit Card Refinancing
Save on the interest component
A significant of your credit card repayment constitutes interest because of the high APR that can go even up to 36%. If you continue repaying the minimum amount due every month, you end up taking a long period to close the loan. Credit card refinancing allows you to shift your loan balances from a high APR account to a low APR account (usually 0%). You end up saving a lot on the interest component.
Improve your credit rating
Usually, the banks do not classify you as a defaulter when you pay the minimum payment due on the credit card regularly. They do not report the fact to the credit rating agencies. However, it can still affect your credit rating because the credit utilization factor comes into play. As you shift your balances to a new card, your credit utilization factor reduces thereby improving your credit rating.
Get out of the debt trap
By now, you know that paying the minimum amount due every month pushes you into a debt trap. Credit card refinancing provides you with an opportunity to break out of the debt trap.
Risks of Credit Card Refinancing
The temptation to use the credit available
When you avail credit card refinancing, it results in the restoration of the limits on your erstwhile credit card. Therefore, there is a temptation of using the card again and raking up your debt. However, you can use the card limit prudently and not risk falling into a debt trap again. It would help if you had the financial discipline to prevent such a situation.
Increasing debt on the new credit card
Remember that your new balance transfer credit card offers a 0% APR on the balance transfer amount alone. This facility is not available to new debt that you could incur on the new card. Hence, it is better not to use the new credit card until you clear the entire debt. In this way, you get the advantage of 0% APR and avail the benefit of the interest-free period available on all credit cards.
Credit card refinancing is an excellent solution to come out of a debt trap. Use the facility wisely and improve your financial position. Temptations will always be there, but you should exercise adequate fiscal discipline to avoid falling back into a similar situation. You might not get another chance, as your credit ratings can plummet downwards.