What happens when you buy a Visa gift card with a credit card?

The Credit Card Conundrum: When Buying a Visa Gift Card Impacts Your Credit

Visa gift cards offer a convenient and flexible way to give a present. They can be used almost anywhere Visa debit cards are accepted, making them a popular choice. But what happens when you use your credit card to buy one? It’s not as straightforward as you might think, and the seemingly harmless transaction can actually have repercussions for your credit score.

The core issue boils down to how your credit card balance is affected. When you swipe your credit card to purchase that Visa gift card, you’re essentially adding to your existing debt. This seemingly simple act introduces a domino effect that can negatively impact your creditworthiness in two key ways:

1. Increased Credit Card Balance: This is the most obvious consequence. The purchase amount of the gift card is added to your outstanding balance. While you might intend to pay it off quickly, it’s still debt that accrues interest if left unpaid.

2. Higher Credit Utilization Ratio: This is where the real damage can occur. Your credit utilization ratio is the percentage of your available credit that you’re currently using. It’s calculated by dividing your outstanding balance by your total credit limit. Credit bureaus consider this ratio a significant factor in determining your credit score.

A low credit utilization ratio (ideally below 30%) signals to lenders that you’re a responsible borrower who manages credit well. A high ratio, on the other hand, suggests you’re heavily reliant on credit and may be at risk of defaulting.

When you use your credit card to buy a Visa gift card, you’re inflating your outstanding balance, which in turn increases your credit utilization ratio. Even a modest gift card purchase can push you closer to, or even over, that crucial 30% threshold, leading to a dip in your credit score.

Think of it this way: Let’s say you have a credit card with a $5,000 limit and a current balance of $500. Your credit utilization ratio is 10% ($500/$5000). Now you purchase a $300 Visa gift card. Your balance jumps to $800, and your utilization ratio climbs to 16% ($800/$5000). While still below the 30% threshold, it’s a noticeable increase that, if repeated with other purchases, can quickly escalate.

Beyond the Credit Score:

It’s also important to consider other potential drawbacks:

• Cash Advance Fees: Some credit card companies might classify the purchase of a gift card as a cash advance, subjecting you to higher interest rates and fees. This is less common with Visa gift cards purchased at retail locations, but it’s always worth checking your cardholder agreement.

• Missed Rewards: While you might earn rewards on the purchase, these rewards might be offset by the potential negative impact on your credit score, especially if the increased balance leads to late payments or interest charges.

So, What’s the Verdict?

While using a credit card to buy a Visa gift card isn’t inherently bad, it’s crucial to be aware of the potential consequences. If you have the funds to pay off the balance immediately, the impact on your credit score will be minimal. However, if you’re already carrying a balance or struggling to manage your credit, using a credit card for this type of purchase could further damage your creditworthiness.

Before you reach for your credit card to buy that gift card, consider alternative payment methods like cash or a debit card. While they might not offer the allure of rewards, they offer a more responsible path to maintaining a healthy credit score. Understanding the potential implications of seemingly simple financial decisions is key to building a strong credit profile and achieving your long-term financial goals.