If you’ve been stuck on the credit card debt treadmill for a while, struggling to make anything more than the minimum monthly payments, you’re probably looking for a way out. Maybe at some point this brilliant idea occurred to you (maybe it was in the middle of the night and it came to you in a dream and you shot straight up like they do on TV and said it aloud): “I know what I’ll do! I’ll pay off my credit card with another credit card.”
Yes, you can use one credit card to pay off your balance on another — though it isn’t all that simple and comes with a few caveats.
First thing: You can’t actually pay off credit debt with credit.
Unfortunately, none of the major credit card issuers allow credit card debt payment by credit card.
And while you can technically use a cash advance on a new card to pay off your other card’s balance, there’s typically going to be a cash advance fee of $10 or $20 (if not higher), and most cards carry an increased interest rate on cash advances—1-7% higher on average than the standard rate. So if your standard rate is 15%, the interest rate on your cash advance could be 22%, which entirely defeats the purpose of your brilliant idea.
What you’ll want to opt for instead is transferring your credit card’s balance onto a balance transfer card.
What’s a balance transfer card? And how can it benefit me?
A balance transfer card is a credit card that lets you transfer your debt over from another account, usually with a 3% or 5% transfer fee. Many balance transfer cards offer 0% introductory APR periods that allow you to pay down the balance within a certain amount of time (often 12-18 months) without accruing interest.
Here are a few reasons balance transfer cards might be a good option for you:
- They can save you money. The number one way balance transfer cards benefit you is by affording you some breathing room to pay down your balance while paying little to no interest. If you’re carrying a balance on a high-interest card, paying down your debts will take even longer. Balance transfer cards give you the opportunity to pay down debt without the ongoing setbacks of high interest charges.
- They can simplify your payments. Consolidating all of your debt onto one lower-interest credit card might make it easier to manage your payments. If you’re having trouble keeping track of minimum payments and payment dates across your various accounts, having a single card might help you stay on top of your debt.
- They can improve your credit utilization. Credit utilization factors into your FICO® Scores. If you’re close to maxing out a credit card, opening a balance transfer account and spreading out your balance between multiple cards can improve your credit utilization ratio. Let’s say you have a $2,000 balance with a $3,000 limit (66% credit utilization). Adding a balance transfer card with, say, another $3,000 limit into your credit mix will increase your available credit and lower your utilization ratio (now 33%), which can improve your FICO Scores.
Let’s do some math.
If you’re starting to shop around for a new card to transfer your balance onto, you’re going to need to figure out the terms of the offer and calculate your payments. There are a few things you should be looking for in particular: introductory interest rate, introductory period length, balance transfer fee, and interest rate after the introductory period.
So let’s say card A offers a 0% introductory interest rate for 12 months, with a 5% balance transfer fee, and a 10-15% variable interest rate after the introductory period.
And let’s say you want to transfer a $2,000 balance from a credit card with 18% APR onto card A.
To pay off your current card you’d need to make $197 minimum monthly payments for 12 months.
If you transfer your balance onto card A, you’d only need to make $175 minimum monthly payments for 12 months to pay off your balance.
That means that by transferring your balance onto card A and making the calculated minimum monthly payments, you would end up saving $264 paying off your debt in a year.
It’s important to understand the terms of each card offer and calculate your payments accordingly. You don’t want to end up paying more than you would have in the first place because you couldn’t pay off your balance within the introductory period.
Some final words of caution.
Here’s the thing: if you can’t pay off your balance within the introductory period, or if you make delinquent payments on your balance transfer card, you can throw all that math we just did out the window.
Once the introductory period is over, that super-low interest rate that initially enticed you disappears, and you might start getting charged a higher interest rate than the one on your original credit card. So you’re going to want to be realistic about how much of your balance you can pay off within that introductory period.
There’s nothing wrong with transferring only a portion of your balance over—you’ll still save the money that you’d be paying in interest on that portion.
Another option is to apply for a balance transfer card that has a consistently low interest rate, so that you’ll be paying less interest than your current card but without the risk of slipping into the variable rates of a 0% intro APR card.
Of course, you’ll also have to qualify for these offers, so it doesn’t hurt to know your FICO® Scores before you apply.
If you’re interested in transferring your credit card balance onto a balance transfer card, check out our Savings Center. We have a lot of great cards available.