Should you transfer someone else’s balance to your credit card?

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Some issuers allow it, but be careful when taking on someone else’s card debt

Staff Reporter
Focusing on credit scores and what consumers can do to improve them

Should you transfer someone else's balance to your credit card?

Transferring someone else’s card balance to your credit card
can wreak havoc on your finances and ruin relations with the other person if
not handled the right way.

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 … 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.”


“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. 

See related: How does a balance transfer affect your credit score?, Balance transfer: The best way to pay down card debt? 




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