24 Signs That You Could be in Financial Trouble #18: Using One Credit Card to Make a Payment on Another
In this series I am covering the 24 tell-tale signs that you could be in financial trouble. Over the next few weeks I will be presenting these signs, how to identify them and tips on how to address the issue.
The past few entries in this series have dealt with misuse of credit cards, and for good reason. Credit cards are one of the biggest reasons that people end up in financial trouble. Again, credit cards are not inherently bad, but using them incorrectly can significantly impact your financial future. Another misuse of credit cards can be when you use the credit available on one card to make a payment on another card.
Why This is a Horrible Idea
It should be quite clear as to why using high-interest credit to make a small payment on another high-interest card is a bad idea. I’m not talking about doing balance transfers, but I’m specifically referring to those who don’t have the cash to make the payment on a card so they use the available credit from another card to make the payment.
If you can’t afford to send in a check or make a payment from your available cash on a credit card, using another credit card to make the payment is simply a terrible idea. Generally someone who is in this position is going to be making minimum or close to minimum payments. Because of this that means it is unlikely that the payment taken out of the one card will be paid off in full anytime soon.
That $100 payment you made from your credit card, even if paid off in one year will wind up costing you $15-$30 in interest alone, not to mention the fact that you are not reducing your outstanding debt at all. Even worse are those who make this a recurring event, all it is doing is shuffling your debt from one card to another while being charged double the interest. If you want to be sure you’re in debt forever, this is a great way to do it.
It is Difficult, I’ve Been There Before
I know how hard it can be to avoid situations like this because I’ve been there myself. When I was self-employed I had a relatively small amount of debt in the form of a credit card, it was a card I used for the business and had a limit of around $5,000. Over time the balance had continued to grow when there wasn’t much income coming in and before I knew it even the minimum payments became difficult to make. So I had the brilliant idea of taking out a line of credit to use during times when cash flow was tight.
Boy was that a mistake. The line I received was for $10,000. I went a few months without using it but we hit a rough patch where we had almost no income. I used the line of credit, or what I considered our safety net to occasionally pay some bills that were not covered by the incoming money. Of course the intent was that business would pick up and we’d just pay it off in full. That didn’t happen and the next thing I knew we were writing checks from the line of credit to our credit card among other bills.
Over the course of about a year we went from about $5,000 in total debt to close to $12,000. The credit card came down a bit but all of those payments we made from the line of credit continued to mount. This resulted in increased finance charges on both of the debts as well as hurting our overall cash flow even further.
We finally stopped using the line to make payments, but for nearly 2 years following we couldn’t make much more than the minimum payments on each. Even at only 2 years we paid out over $4,000 in finance charges thanks to our stupidity. It was a very costly mistake. It is hard to realize how quickly things can compound and get out of control.
The Answer? Don’t Do It
I know, easier said than done when you are in a pinch, but honestly if you are faced with that decision you should look at your options. Unless you just experienced a devastating emergency that has suddenly depleted all of your funds this is a situation that is not going to be isolated. Thinking that you can do it just this one time and then get back on track is a bit foolish. More than likely you are going to find yourself faced with this decision at more times in the future which will lead to just compounding the problem.
If you are faced with a timing issue and are looking at a late fee versus using another card to make a payment then ask yourself what the true cost of that will be. If you are assessed a late fee and still pay in under 30 days from the due date it shouldn’t affect your credit report, but only cost you a bit of money for the late fee. Depending on how much the fee is and how large the minimum payment is it may actually be cheaper to pay the fee and send in your payment a few days late once you have the cash. Regardless, in either situation you need to take a hard look at why you are faced with this decision.
You need to address the real reason you’re in this situation. If you are resorting to using credit to pay other credit bills it is clear you are in trouble. The first step is to find out why you’re in this situation and make an effort to resolve it. There are many options you can take from contacting your lenders to discuss your situation to getting assistance with your debt or spending habits. Whatever your case may be, using credit just to make payments on other credit is only shifting the burden and costing you even more money in interest.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.