Going deeply into debt on a credit card with a high interest rate may prompt you to take out a second card to pay off the balance. But can you really pay off a credit card with a credit card?
“The short answer is no,” says Paul Golden, spokesperson for the National Endowment for Financial Education.
Credit card companies generally won’t allow you to use one credit card to pay off debt on another card, Golden says. Much of this reluctance is due to the costs associated with the treatment.
If you want to pay a credit card bill with another credit card, you have to get creative. “There are workarounds,” Golden says.
The main ways to achieve this are:
– Take a cash advance on one card to pay the other.
– Use a balance transfer.
Both approaches have drawbacks, Golden says. “I don’t see a lot of benefit, especially with the cash advance,” he says.
The pros and cons of cash advances
The main attraction of cash advances is the instant gratification – you don’t have to wait for approval and you can get cash whenever you need it.
Show your card at a bank branch or at an ATM, use a convenience check from your card issuer, or request a cash advance on the issuer’s website or mobile app.
You can borrow up to your cash advance limit, which is usually a percentage of your card amount. Credit limit.
Convenience can come at a price. You will have to repay the advance, as well as the costs and interest.
A cash advance usually involves high fees that make it a bad option for paying off debt, Golden says. Typical cash advance fees are between 2% and 5% of the advance amount, with a minimum charge of $ 5 to $ 10, depending on a US News Credit Card Fee Study.
If you use a credit card to withdraw money from an ATM, you may also pay an ATM fee. Plus, your interest rate will be higher for cash advances than for regular purchases, and you won’t have a grace period until the interest starts accruing.
However, cost is not the only concern with cash advances. The cash advance cap may mean that you won’t be able to withdraw enough to cover a big credit card bill.
“Normally, your cash advance limit will be much lower than your line of credit,” Golden says.
[Read: Best 0% APR Credit Cards.]
The pros and cons of a balance transfer
A balance transfer credit card with a 0% annual introductory percentage rate can help you save money and pay off debt faster because your payments are fully allocated to your principal balance. Many credit card companies offer introductory rates on balance transfers that last at least a year.
You can also transfer multiple debts to a balance transfer card to make a single monthly payment.
Find a card with a very low interest rate to use this strategy well, says Sierra Izzard, director of operations at Pacific Debt, a debt settlement company in San Diego.
“You take a balance with higher interest – maybe 10%, 15%, 20% interest – and you consolidate on a card that has a promotional interest rate as low as 0%,” Izzard explains.
But one caveat is that a balance transfer can only pay dividends if you stay disciplined and determined to pay off the balance as quickly as possible, says Izzard.
“If you can put it all together on one card and you can double, triple, quadruple your minimum payment to pay off that card during the promotional interest rate, that makes a lot of sense,” he says.
A balance transfer card is not the right choice for everyone.
The new card might encourage you to spend money you don’t have, for example, if you don’t have a repayment plan. This means that you cannot pay off the debt you transferred to the card and only increase your debt.
Make sure you know the duration of the card introductory rate so that you can plan how to clear the balance. Introductory offers can last from six to 21 months, according to the Experian credit bureau.
You can also expect to pay a balance transfer fee of 3% to 5% of the transfer amount, with a minimum charge of $ 5 to $ 10, according to the US News Credit Card Fee Study. This amount is about the same or slightly more than the fees you would pay for a cash advance.
“That can be quite a large number, depending on how much money you owe,” Izzard explains.
This move might not work for someone who “barely holds it up” and makes minimum payments, says Izzard. “It might be a riskier strategy for someone like that.”
A balance transfer is also not the best choice for you if you tend to miss or fall behind on your payments. “Typically, you’re going to lose your promotional rate, and it’s going to go up to a default rate,” Izzard explains.
This default rate, or penalty rate, is often at or near 29.99%, according to Experian, and won’t be removed until you make six consecutive payments on time.
You will also need to have good credit to qualify for most balance transfer cards, which can be a problem if you have a lot of debt and are behind on payments.
Alternatives to credit cards
Other options might be better for paying off your debt than a cash advance or balance transfer. Here are just a few:
Debt consolidation. A debt consolidation loan is a good alternative, as long as you get one with a low rate and agree to pay back what you owe.
Credit counseling. You might also consider talking to a credit counselor if you’re feeling overwhelmed. Contact an agency approved by the National Foundation for Credit Counseling, who can help you understand your options and develop a personalized plan to solve your money problems.
Debt avalanche and debt snowball payment strategies. Either method can help you pay off your debt. List your debts and plan to make minimum payments on all but one debt.
If you select Debt Avalanche, you will pay off the cards in the order of highest APR to lowest APR. This approach saves you the most money because you pay the least amount of interest. The Debt Snowball pays off cards from the lowest balance to the highest balance to provide a quick win and motivation to keep going.
[Read: Best Rewards Credit Cards.]
Get to the root of the problem
No matter how you pay off your debt, you’re unlikely to stay in debt unless you answer a more in-depth question: why are you spending too much money in the first place?
Look closely at how you got into debt, Golden says.
“If you max. a credit card, I would stop there and find out what happened, ”Golden says. ” What did I do ? What did I charge? Was this an appropriate charge? How come I can’t pay my balance every month? “
Committing to better spending habits rather than looking for another quick fix is the best way to deal with a debt problem, says Golden. “Unless you fix the problem with the behavior, you’re just going to have more problems down the road,” he says.
Someone could use a balance transfer to transfer debt to a new card only to start the cycle of spending on the old card again, Golden explains.
A budget is a good place to start to avoid skyrocketing debt.
“The first thing all consumers should do is sit down and budget for themselves,” Izzard explains. “Look at how much money they come in and how much they take out each month and figure out what they can afford to pay on a monthly basis.”
Unfortunately, it doesn’t take much time and effort to put yourself in a bad financial position, Golden says. “It takes a lot longer to get through – and a lot more planning and a lot more work,” he says.