Assuming another’s high-interest debt can help them lower their debt costs, but you may never get paid back
In general, major card issuers have no restrictions against transferring a balance from a card that isn’t in your name. But they typically prohibit any balance transfer from a card that is from the same issuer. (Some, such as American Express, explicitly do not allow balance transfers from a card that isn’t in your name.)
Assuming another’s high-interest debt can be an effective way to help them lower their debt costs, particularly if the other person is unable to qualify for a balance transfer card with a favorable APR on their own.
However, this kind of arrangement is essentially a loan – you’re borrowing from your card issuer to get the other person out of a jam. Meanwhile, the beneficiary of your kindness is no longer legally responsible for paying the debt. If he fails to meet any repayment arrangement, you may be stuck with a heap of debt for which you weren’t initially responsible, and it could hurt your credit score.
“It’s a loan, and it’s no longer in [the other person’s] name,” said Linda Jacob, financial counselor at Consumer Credit of Des Moines. “When you put it on your credit card \u2026 it’s being reported for your FICO score and it’s showing as part of your debt-to-income ratio.”
Credit score damage is one of several potential negative consequences. You could be rewarding bad money habits that put your friend or loved one in debt in the first place, and your relationship may suffer if you agreed on a repayment plan that isn’t being adhered to. You can always take the other person to small claims court to recoup any money that isn’t paid back, but that will cause more tension.
On the other hand, it is possible to make the arrangement work for both parties if you set some ground rules.
How does taking on someone else’s debt affect your credit?
Transferring someone else’s card balance to a card you own could have an immediate impact on your credit score. You could lose a few points from a hard inquiry if you apply for a new card on which to transfer the balance. The transferred debt could also lower your score by increasing your credit utilization – the second most important credit scoring factor – depending on how high the balance is relative to the new card’s credit limit.
However, the balance transfer could help your score in the long run, if you consistently make on-time payments and refrain from using the new card for anything else. As you pay down the balance, your utilization on that card will decrease, potentially boosting your score with the addition of the increased credit line.
Unpaid debts can fray family ties
There are some situations in which taking on someone else’s credit card balance can be harmless. For instance, your spouse may have a large balance on a high-interest card that he or she owns and uses for household expenses. If you have excellent credit and your spouse does not, it may make sense for you to apply for a balance transfer card with a lengthy introductory no-interest period and shift the debt onto that new card as you both devise a repayment plan from joint accounts.
But many personal finance experts draw the line at taking responsibility for a friend or relative’s debt. Research shows those kinds of arrangements often don’t turn out well. A 2016 CreditCards.com poll revealed 4 in 10 U.S. adults who co-signed loans or credit cards for their loved ones ended up paying some or all of the bill.
It’s critical to weigh your desire to help someone you care about against potentially putting yourself in financial jeopardy.
“Part of the reason why people do it is emotional,” said Sugato Chakravarty, professor of consumer economics at Purdue University. “Emotions are exactly the wrong things to have where finances are concerned. It’s great to think about bailing out a friend or a loved one, but then if something goes wrong, you are in it big time. It’s not sensible.”
Jacob of Consumer Credit of Des Moines noted that a debt transfer between two family members or friends can also be toxic to the relationship, particularly if the indebted person isn’t holding up his end of the bargain.
“The person who owes you money is going to be uncomfortable if they’re not paying,” she said. “Imagine having to hang out with someone you owe money to. It’s weighing on your brain the entire time you’re with them.”
A parent who has an adult child drowning in debt may naturally want to come to the kid’s rescue, and a balance transfer can be one way to help. But the parent should first consider the reasons why the child ended up in a financial bind before offering assistance. If poor money management is the cause, simply taking on a child’s card debt may not deter him from making more financial mistakes in the future.
“The question behind all of this is why did they run it up in the first place?” said Shellee Henson, a therapist at Financial Therapy Associates of Dallas. “That’s what you have to fix. Paying off their credit card is kind of like putting a Band-Aid or first-aid cream on a scratch. It helps to heal, but it doesn’t deal with why they got scratched in the first place.”
Set rules when taking on someone else’s card balance
If you really want to help a loved one with a balance transfer, Henson recommends establishing a written contract with clear stipulations for repayment of the transferred debt. Those may include a firm payment timeline and a mutual agreement that the transferee won’t take on any additional card debt until the original debt is paid back.
Henson also suggests getting a clear picture of the other person’s finances – including income and expenses – before entering into any agreement. You could even go so far as to ask the other person to let you monitor his online bank accounts, depending on your level of mutual trust.
“You may not necessarily need to check their bank balance every month, but you have that access if you need it,” Henson said.
What to do if you don’t get paid back
If the other person welches on the transferred debt, you may be able to recover the amount you need to pay it back in small claims court. The maximum amount you can request in a small claims court varies by state, and ranges from $1,500 to $25,000. And you don’t need to hire a lawyer.
“All you have to do is file paperwork and go represent yourself and talk to the judge,” Chakravarty said. “There are ways the judge can force the other person to pay.”
Of course, legal action against a friend or family member could cause irreparable damage to the relationship. If you’re the forgiving kind, you could just consider the balance transfer a gift, pay back the debt as best you can and eventually let bygones be bygones. After all, your loved one’s inability to pay back the debt could be indicative of a problem greater than financial irresponsibility.
“Is it that they don’t understand how to manage their money or is there something else going on that’s causing them to spend a lot?” Henson said. “There are several different health disorders that can involve uncontrolled spending.”
Make sure both sides can benefit
Before transferring someone else’s balance to your card, consider the reasons why the other person is in a bind and decide if your assistance is truly helpful or counterproductive. Should you choose to proceed, set clear rules for repayment and make sure the other person understands them.
Know what your legal options are in the event the indebted person violates the agreement terms. And be sure you have enough funds available to absorb the debt without hurting yourself financially and damaging your credit if the other person defaults.
A successful debt transfer with full, timely repayment can be beneficial to both people. The person you helped will be set free from a costly debt and your credit score may soar to new heights with an expanded credit line and regular, on-time payments.