Can You Use Credit Cards to Pay Off Each Other?

This is a question my friends and I used to debate about from time to time. As everyone started buying houses and earning value they switched to using home value to pay off credit cards. But when you don’t have a home equity line to draw on, can you really leverage one credit card to pay off another?

Yes and no. This is really a high risk strategy and it can play havoc with your credit scores.

Getting More Credit Increases Your Credit Scores

A picture of credit cards piled together.
With great credit comes great responsibility. But when you fall behind on payments, can you use credit cards to pay off credit card bills?

When you are building up your credit worthiness, the more AVAILABLE (unused) credit you have, the better. In fact, the more available credit you have the easier it is to get more credit. This is why financial advisers tell people to pay off their credit cards before applying for a home loan or car loan. If the lenders see that you are borrowing against your available credit, they will charge you higher interest or deny your credit application altogether.

So while it is good to have credit available, it is not so good to be in debt. That is the catch-22 that many people struggle with. If they can get the credit cards then why should they not use them? The secret is to only use credit cards occasionally and only when you can budget for paying them off quickly.

The more available credit you use (borrow against/charge) the lower your credit score drops.

How to Avoid the Balance Transfer Trap

If you have a credit card that is maxed out you’re not likely to get another credit card. But if by some chance you can get a credit card deal that includes a payoff option for one of your other credit cards, you may be able to leverage that deal to reduce your debt.

The most common mistake people make is that they substitute the balance transfer for a monthly payment. In other words, if you’re making a $200 minimum payment on your credit card and another bank offers you a credit card with a balance transfer, you may think, “Hey, I don’t need to make a payment this month.” That is a BIG mistake.

As soon as your balance transfer has completed you should make a payment on your new credit card. Make that payment exactly the same payment you would have scheduled for your previous credit card.

In other words, do not use balance transfers as a means of making credit card payments. That only increases your debt, rather than paying it off.

Use a Large Credit Card to Consolidate Payments

If you are making payments on several credit cards, the chances are pretty good you may be able to consolidate your smaller balances onto a larger card. Every now and then your bank may send you a few balance transfer checks you can use to transfer those smaller balances.

Do this if your larger card has a lower interest rate.

Do this if your new minimum payment will be less than the combined minimum payments on all the cards.

DO NOT DO THIS if it will cost you more in interest or if your new minimum payment exceeds your combined minimum payments.

Rotate Your Credit Cards

You should try to use only one credit card at a time (within a monthly billing cycle). The reason is that most credit cards give you a grace period in which they do not charge interest.

If you have three credit cards with approximately equal limits, interest rates, and grace periods you can use the following strategy to keep your interest fees as low as possible.

Use only 1 card (call it CARD ONE) in January for your purchases. Don’t make any more purchases than you can pay for at one time in February.

In February use CARD TWO for your purchases. As soon as you get the bill for CARD ONE pay off the entire balance.

In March use CARD THREE for your purchases. As soon as you get the bill for CARD TWO pay off the entire balance.

By April you’ll be ready to use CARD ONE again.

This way you’ll only pay annual fees to your three card providers. You can leave your money in a savings account or money market account a little bit longer and EARN some interest. It won’t be much but just leave that interest alone and it will add up over time.

Remember: Always Spend Less Than You Make

No matter how you manage your credit cards, you want to spend less than you earn so that you’ll always be able to save some money and always be able to pay off those credit cards quickly.

And if you have to fall off the three-month rotation plan for any reason, STOP USING YOUR CREDIT CARDS until you have them all paid off again.