The dangers of juggling credit cards

Credit cards are made for purchasing goods and services. Some people, however, may use one of their credit cards to pay the balance of another. It’s a common enough practice that credit card companies now offer balance transfer credit cards, but beware!

Summary

Does it matter if I pay off my credit card with another card?

Getting a credit card cash advance to make the minimum payment on another credit card (surfing from one card to the other) is called kiting. It’s not a solution: it’s a way to delay the problem. And it’s not a practice that banks tolerate.
There are also credit cards that offer balance transfers. You can move the balance from another card to one of these cards. They also have certain advantages like low interest rates. But transferring your balance is only a band-aid solution… and it comes with risks.

What is kiting?

Kiting is essentially using a credit card to pay the balance of second credit card and then using a third credit card to pay the balance transferred to the first. And so on.

When people do this, they build up a collection of credit cards to pay off other cards. As a result, they just carry their debts forward each month.

4 risks of kiting

Banks can impose harsh punishments if they catch you kiting, as it actually violates credit cards’ conditions for use.
Kiting can give you a false sense of freedom. When you pay your credit card balance with another card, you may feel like you’ve eliminated a debt, when in reality you’ve just moved it. You’ll have to pay it sooner or later, in addition to the purchases you’ve made in the meantime.
This collecting of credit cards can easily get out control as you struggle to manage their different conditions and payment dates. The interest and penalties can snowball.
It’s not a good idea to let your credit card balance grow without ever paying it. It hurts your credit score. Also, the more you damage your payment reputation, the harder it will be to borrow money from a financial institution.

What are balance transfer cards?

Seeing the emergence of kiting, credit card companies decided to create balance transfer credit cards.

You can transfer a debt (like the balance of another credit card) to one of these cards while benefiting from a preferred rate. Some, for example, have 0% interest for six months. This gives you some extra time to pay off the balance without accumulating any interest.

But balance transfer cards are only worth using under two conditions:

The interest rate must be lower than the card from which you’re transferring the balance.
You should make sure you’re able to pay the balance of your new card before the low interest promotional period ends. Otherwise, the interest will add up fast…

Properly using a balance transfer card: an example

Let’s say you have a credit card with an interest rate of 19.99% and a balance of $3,000.

A bank offers you another card with 0% interest for six months. You decide to use this card to pay off the $3,000 you owe on the other card.

If you manage to pay back the $3,000 on the new card in less than six months, you’ll have saved the $599.70 in interest that you would have paid over this same period. But if you don’t pay it back in time, watch out!

Why are balance transfer credit cards risky?

Once the promotional period ends, fees and interest apply. Make sure you read the contracts carefully, as these fees can apply retroactively. Some institutions even charge interest on the amount transferred from day one.

What does that mean? It means that if you’ve borrowed $3,000 and have not completely paid it off after 12 months, you may have to pay interest on the $3,000 and not on the amount you have left to pay (even if this remaining balance is just $1).

Balance transfer credit cards are no miracle solution. Especially for the people who use them while continuing to use other credit cards at the same time. They end up with various credit card debts and unable to pay any of them off completely. This is one way to put your credit rating at risk.

Are there other options?

Once we start juggling credit card debts, it’s usually a sign that we’re losing control of our personal finances. From there, things can easily get out of hand.

To get your finances back on track, it’s important to assess your situation. A counsellor in financial recovery and Licensed Insolvency Trustee can assist you and recommend concrete solutions tailored to your situation. Want to know more? Try our chat service. It’s free and 100% confidential.