Humans are designed to help each other; it’s in our genes to make sure those we love thrive. That’s why parents gift down payments to their children, and why children go out of their way to ensure their parents are loved and cared for in their elder years.
So if you could help a loved one out of a financial jam, would you? Would you lend them cash? Would you let them transfer their debt onto your balance transfer credit card? Should you let them transfer their debt onto your balance transfer credit card?
A balance transfer credit card is a credit card that offers you a low interest rate for a set period. The interest rate is usually in the range of 0% to 5% and the period usually ranges from six to 18 months. The favourable interest rate is only applied to transferred balances, not to purchases made with the credit card.
A rock-bottom interest rate for a set period makes a balance transfer credit card a great way to pay down high-interest debt quickly. By letting a loved one transfer their balance onto your balance transfer credit card, you could save them hundreds of dollars in interest payments.
But balance transfer credit cards aren’t without their risks. Once the promotional period expires, the interest rate jumps to a typical credit card interest rate, usually in the range of 19.99%. If the balance isn’t paid off by then, it will start to accumulate interest quickly. There are also often fees associated with transferring a balance, typically a small percentage of the transferred balance.
These drawbacks mean that balance transfer credit cards, while a valuable tool for paying down credit card debt, could be risky to entrust to someone else. If you’re considering letting someone transfer their debt onto your balance transfer credit card, you should consider the following factors.
You’re responsible for paying down the balance
While the person in question may promise to pay down the balance transferred, it’s important to remember that as far as your lender is concerned, you are the only one responsible for this debt. Your name is on the credit card, not the person who is transferring the balance, so if that person cannot meet their obligations, it’s ultimately you who must pay the balance.
If you’re considering allowing someone to transfer a balance onto your credit card, make sure to set out a concrete payment plan in writing. Include any fees associated with the transfer, and make sure that the balance is paid off in full by the end of the promotional period. Document any payments made and keep a running tally of the outstanding balance, and never transfer more than you could comfortably pay off yourself if the borrower defaults on their payments.
Your credit score could be vulnerable
Beyond being responsible for the debt should the borrower default, putting someone else’s debt on your credit card could put your credit score at risk. Missing a payment, even just one, will negatively impact your credit card. Carrying a large balance, even one you plan to pay off promptly will also ding your credit score.
If the borrower defaults on the payments and you have trouble meeting the debt obligations yourself, your credit score will decrease. A decreased credit score can persist for years, which could impact your ability to qualify for the lowest interest rates in the future. If you plan to purchase a home in the future, a less favourable mortgage interest rate could cost you ten’s of thousands of dollars in extra interest charges.
The bottom line
Allowing someone to use your balance transfer credit card is a risky move that could put you in a vulnerable financial position. Even if you have complete confidence in the borrower, you should never allow them to transfer more than you can pay off yourself. If you decide to move forward with this risky proposition, make sure to write out the terms of the agreement for both parties. Document all payments and outstanding balances be prepared to pay the balance in full if the borrower defaults.
Photo: Matthew Henry
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