As COVID-19 has rocked the financial well-being of many individuals, those who find themselves in a more secure place may want to help a loved one (or even a down-on-their-luck stranger) with their credit card debt. Here’s how you can pay someone else’s debt and how it might impact you.
COVID-19 has wreaked havoc on peoples’ lives, including their financial well-being. Although consumers are charging more to get by, the relief is short. Payments come due in a matter of weeks and escalating balances cause even greater anxiety.
An April 2020 CreditCards.com poll found that 23% of consumers have increased their credit card debt during the pandemic, and nearly half of them are stressed about their debt. If you’re in a stable financial position, you may find yourself wanting to help someone who is struggling with their bills.
“This can be a temporary help for someone that is experiencing financial hardship or a way to ensure that they have credit available to make purchases online,” says Jennifer Streaks, a personal finance expert from Brooklyn, New York. “During these uncertain financial times, this is a very kind thing to do to help someone.”
Here’s everything you need to know about how to donate to another person’s credit card debt.
How to pay someone else’s credit card debt
Choose the right recipient
Dana Menard, a financial planner and founder of Twin Cities Wealth Strategies, says your first step is to make sure you’re giving to the right person – especially when participating in crowdfunding platforms like GoFundMe. Plenty of people make pleas for assistance with their credit card debt.
“Scammers are out there,” says Menard. “Are they really in dire straits, or just looking for a handout? That’s hard to know sometimes. Giving to someone you already know and trust is usually a better idea.”
Once you’ve done your due diligence and decided on the right person, figure out the amount of money you can afford to give. That sum must not put you at a disadvantage.
“Review your own finances and make sure you have a personal emergency fund,” says Menard. “Anything can happen right now, and you don’t want to be in a position where you can’t make ends meet.”
Determine a figure that’s discretionary, then stick with it even if the amount seems small.
A debt reduction gift can be structured in a few ways:
Not having to pay a bill can alleviate a huge burden, especially if the person is having a hard time covering basic expenses. Credit card issuers usually expect minimum payments of around 2% of the balance. So, if you know the person owes $10,000 on a card, $200 toward the payment should take care of it.
Delete the debt
If you’re particularly generous and have the extra funds to spare, you can pay off the person’s entire credit card balance. That way they won’t have to think about the debt again.
Offer a loan
Credit card interest rates can be in the upper 20s, making it very expensive for the cardholder to get out of debt when just sending the minimum payment. Consequently, another option is to give the person an interest-free loan so they can pay the card off and then repay you.
“Of course, if you do this, you have to trust that they will pay you back,” says Menard. “Spell out the repayment terms. For example, you may agree to no payments until they resume working and then fixed payments for six months after that.
How to donate to the person directly
The first way to make a debt payment gift is to provide the money directly to the person, who will then turn around and apply it to the account. You can do so in the form of cash or a check. Or you can use a payment app, like Venmo or Zelle.
Whichever you use, the general process is the same:
- Locate the person on the app.
- Select “pay to” and enter the amount you want to give.
- Add a note, such as, “Here’s $200 to cover your Wells Fargo card payment!”
- Set the transaction to private mode. Most payment apps automatically defer to a public setting. The recipient probably won’t want the whole world to know they’re in debt.
How to donate via the credit card company
Another way is to pay the creditor. Because it will guarantee that the money is applied to the person’s credit card account, it may be preferable.
“If it were me, I would make a payment directly to the account,” says Streaks. “It’s quicker and easier. You don’t have to worry if the money is being used the right way. During this time of coronavirus, people are making online purchases, so when you pay down their debt, you know you’re definitely helping them out.”
All of the major credit card issuers and companies allow you to make a payment to a different cardholder’s account, and the process is consistent. “As long as we can find the specific account, we can help the individual make their gift,” says Brittney Mitchell, public relations strategist for Discover.
In general, you have two options:
Call the company and explain to the customer service representative what you want to do. You will need the person’s:
- Full name
- Complete account number or Social Security number
- Your checking or savings account routing number (You may be able to pay with a debit card, but it’s a more complicated transaction that could require being transferred to a different department).
Here’s a list of phone numbers for a few issuers:
|American Express||1 (800) 528-4800|
|Bank of America||1 (800) 732-9194|
|Capital One||1 (800) 227-4825|
|Chase||1 (800) 935-9935|
|Citi||1 (800) 950-5114|
|Credit One||1 (877) 825-3242|
|Discover||1 (800) 347-2683|
|Wells Fargo||1 (800) 869-3557|
How fast the payment is posted depends on the creditor. For Discover, the money will be applied to the debt the same day, before 5 p.m. Eastern Standard Time (EST). But for American Express, it can take 24 to 36 hours to post.
You can also send a personal check to the company. To complete the process, you’ll need:
- The creditor’s correct address. Banks and credit card companies usually have multiple mailing addresses. The one you want will be on the person’s account statement.
- The person’s full name, written on the check. For example, it should read, “Payment for Jane Smith’s account.”
- The person’s account number or Social Security number, written on the check.
Whether you pay by phone or mail, if the person is set up with email or text alerts, the credit card issuer will send a notification that the payment has been received and the balance reduced by that amount. Otherwise (unless you tell the person about the gift), they will find out when they check their statements.
How to donate to a third-party payment plan
It’s possible that the person you want to help has already taken steps to deal with their debt by going to a credit counseling agency and enrolling in financial management which includes payment plans and debt consolidation. If so, and you know they are struggling to meet those payments, you can make a payment for them.
Katie Ross, education and development manager for American Consumer Credit Counseling, says to mail a check. What you would need is:
- The name and mailing address of the credit counseling agency.
- The client’s ID number and full name.
Send a letter with an explanation that you want to make a payment on behalf of the client and provide the person’s identification information and a check in the amount you want to give. After that, Ross says, your donation will be complete.
Be aware of potential downsides
As great a gift helping someone with their credit card debt is, there are also issues to consider before taking that action:
Tax complications and consequences
“It will be very important to keep a record of how much you give and who it’s going to,” says Menard. “In 2020, you can give up to $15,000 per person without needing to file a gift tax return.”
According to IRS rules, as the donor, you are typically responsible for paying any gift tax due, though you may be able to make an arrangement to have the person you’re helping out pay the tax. If the amount you give is an especially large figure, communicate with the person about tax issues.
Giving money to a friend or family member can be an emotional event that doesn’t always end well. That person may be embarrassed or feel obligated to you – which can put a damper on the gift.
If the person doesn’t use the money to repay their credit cards bills but buys something you consider frivolous instead, or you expect to be repaid but aren’t, resentment will likely build. Therefore, think through all the possible relationship ramifications and reconsider if you feel uncomfortable.
If you want to help someone get to a better financial place, paying down their debt can certainly do that. On-time payments will be noted on their credit reports and their credit utilization ratio will benefit by owing considerably less than their limit. So, what could be the problem?
If the person applies for more cards and accumulates additional debt or charges up their existing cards again, they could end up right back where they started. And you may not have the resources (or desire) to help out again.
On the positive side, creditors are helping their cardholders with payment assistance programs specific to the coronavirus pandemic. As you reach your benedictory limit, encourage the person to reach out to their card issuer. They may be able to make a lower payment or even nothing at all for a few months, without suffering any credit damage.
When your finances are in a healthy state, assisting someone who is trying desperately to pay their bills and get out of debt can be one of the most valuable actions you can take.
“Whenever times get tough and the economy screeches to a halt, it shines a light on the haves and have-nots,” says Menard. “If we can all do a little something to help a person in need, we’ll come out of this pandemic faster – and better than before.”