Falling deeply in debt on a credit card with a high interest rate might tempt you to whip out a second card to pay off the bill. But can you really do that?
“The short answer is ‘no,'” says Paul Golden, director of media relations for the National Endowment for Financial Education in Denver.
Golden says credit card companies typically will not allow you to use one credit card to directly pay the debt on another card. That reluctance is largely due to fees associated with processing. “It’s very expensive for credit card companies to transact that way, so they typically do not allow it,” he says.
So, to pay off one credit card with another, you need to get creative. “There are workarounds,” he says.
The two primary ways to use a second credit card to pay debt on a first credit card are to:
- Take a cash advance on the second card.
- Use a balance transfer to move the debt from the first credit card to the second card.
Golden sees potential drawbacks with each of these approaches. “I don’t see a lot of pros, particularly with the cash advance,” he says.
The Pros and Cons of Cash Advances
Taking a cash advance against a second credit card is one way to pay debt on the first card.
“Theoretically, you could [get a] cash advance off of one credit card, deposit it into your checking account and then pay another credit card from there,” Golden says.
However, he says a cash advance usually involves “very expensive” fees that make it a poor option for paying off debt.
The typical fee on a credit card cash advance is 5 percent or $10, whichever is larger. In addition, typically there are limitations to how big a cash advance you can get. “Normally, your cash advance limit is going to be far less than what your credit line is,” Golden says.
So, if you have a lot of debt, a cash advance might not cover it.
The Pros and Cons of a Balance Transfer
On the other hand, balance transfers can make sense in the right situation, Golden says. “The balance transfer option is tricky, but it can be effective,” he says. “If you can roll over a high-interest balance rate to something that’s lower, that’s great.”
Sierra Izzard, director of operations at Pacific Debt, a San Diego-based debt relief and debt settlement company, says you want to find a card with an exceptionally low interest rate to use this strategy effectively. Many credit card companies offer promotional rates in which you can transfer a balance to their card and enjoy a very low rate for a year or more.
“You are taking a balance that is higher interest – maybe 10, 15, 20 percent interest – and you’re consolidating to a card that has a promotional interest rate as low as zero percent,” he says.
A balance transfer can pay dividends for people who are disciplined and committed to paying off the debt on the second card as quickly as possible, Izzard says. “If you can consolidate everything onto one card and you’re able to make double, triple, quadruple your minimum payment to pay that card down during the promotional interest rate, it makes a lot of sense,” he says.
However, Izzard says that using a balance transfer is not a risk-free move, particularly for someone who is “just barely holding on” and making minimum payments. “It could be more of a risky strategy for somebody like that.”
Izzard says the promotional rate on many balance transfers expires if you miss a payment. So if you have a setback – such as a job loss or medical issue – and you are late with a payment, you could be in worse trouble than you were before the balance transfer.
“Typically, you’re going to lose your promotional rate, and it’s going to go to a default rate,” he says. He adds that he has seen default rates as high as 29 percent.
In addition, a balance transfer usually involves a fee, but it typically is lower than what you would pay with a cash advance. Both Izzard and Golden say their experience is that this fee averages around 3 percent. “That can be a pretty significant number, depending on how much money you owe,” Izzard says.
There are other options for paying down debt that might make more sense than a cash advance or balance transfer. Golden says a debt consolidation loan is a good alternative, as long as you get one with a low rate and are committed to paying down your debt. “Those can work very well,” he says.
You also might consider talking to a credit counselor if you’re feeling overwhelmed. Contacting an agency accredited by the National Foundation for Credit Counseling can help you understand your options.
Getting to the Root of the Problem
However you decide to pay down your obligations, it is unlikely you will stay out of future debt trouble unless you resolve a deeper question: Why are you overspending in the first place?
“The first thing that all consumers should do is sit down and go through a budget for themselves,” Izzard says. “Look at how much money they have coming in and how much they have going out each month and determine what they can afford to pay on a monthly basis.”
Golden agrees that getting to the root of the spending problem is crucial if the borrower is going to fix the debt problem now – and avoid falling into the same trap in the future.
Golden says he knows firsthand how difficult it can be to turn around poor spending habits. “I’ve been in this space,” he says. “I’ve had credit card debt and a poor credit score as a result of that.”
He encourages anyone with a similar issue to take a hard look at how they got into debt. “If you max out one credit card, I would stop there, and I would figure out what happened,” Golden says. “What did I do? What was I charging? Was it an appropriate charge? How come I can’t pay off my balance every month?”
Golden says he sees many situations where someone deeply in debt will use a balance transfer to pay off debt on one card and then start the spending cycle over again once the first card has been cleared. “Unless you remedy the problem with the behavior, you are just going to have more problems down the road,” he says.
A commitment to a new lifestyle and better spending habits – rather than looking for a quick fix via a cash advance or balance transfer – is the best way to get a handle on your debt problem, Golden says.
“The reality is that it takes very little effort and very little time to put yourself in bad financial situations,” he says. “It takes a lot longer to get out of it – and a lot more planning and a lot more work.”