If you are drowning in debt, you may wonder if you can use a credit card to pay off the balance or consolidate your debt. Depending on the lender and type of loan, it is possible to pay off a loan with a credit card. But, before you do so, consider your options and weigh the pros and cons first.
- While you can pay off a loan with a credit card, there are several factors you should consider before doing so.
- You can pay off a loan with a credit card in several ways, including using a credit card with a lower interest rate, doing a balance transfer, getting a cash advance, and more.
Can You Pay Off a Loan with a Credit Card?
Yes, you can pay off certain loans with a credit card. However, this method is generally less convenient and often comes with additional fees. Additionally, most lenders don’t accept credit card payments, such as federal student loan issuers. They typically require payment through an ACH transfer from your bank account or via check. While credit card payments for loans are not commonly accepted, a few potential workarounds are available if you’re determined to explore this route.
5 Ways to Pay a Loan with a Credit Card
1. Find a Low-Interest or Zero-Interest Credit Card
If your loan provider allows credit card payments, look for a credit card with a low-interest rate or 0% APR (annual percentage rate) promotional rate. Find out what the interest rate will be once the promotional period of your new credit card ends. Keep in mind that the APR may increase significantly after the promotional period, potentially impacting your overall costs.
Before applying for a new credit card, compare the new interest rate offered by the card with the interest rate of your current loan. If the credit card’s post-promotional APR is significantly higher, confirm that your budget allows for the necessary monthly payments to clear the entire debt before the promotional period ends.
2. Transfer the Loan to a Balance Transfer Credit Card
Another option is to transfer the loan balance to a balance transfer credit card. Balance transfer credit cards are designed to help you pay off debt by offering a low introductory interest rate specifically for balance transfers. Top options provide a 0% intro APR on balance transfers for 12 to 21 months.
Take the time to compare different cards and their offerings to find the best fit for your needs. Some credit companies may charge a transfer fee ranging from 3% to 5% of the transferred amount. Not every balance transfer credit card will work with loans, and the interest rate may increase significantly after the promotional period. Additionally, the loan amount you transfer, including the balance transfer fee, cannot exceed the card’s credit limit.
3. Use a Third-Party Payment Service
If you’re looking for a way to pay off your loan with a credit card when direct credit card payments are not accepted, consider using a third-party payment service. One commonly used service is Plastiq, which allows you to make payments on various types of loans, including personal loans, auto loans, and mortgages, using your credit card.
With a third-party payment service, you provide the necessary recipient information, and the service handles the payment on your behalf using a funding method accepted by the recipient. However, these services are typically not free and may charge transaction fees ranging from 2% to 3% for credit card payments. For example, Plastiq charges a fee of 2.9% for credit card payments (as of July 2023).
Additionally, using a credit card with these services may be treated as a cash advance by your credit card issuer, leading to additional fees and potentially higher APRs. Lastly, verify if your lender accepts payments from the specific third-party service you intend to use, as not all lenders accept this form of payment.
4. Get a Cash Advance
If you are cash-strapped, a cash advance may be a viable option to pay off a loan with your credit card. This method involves obtaining cash using your credit card, typically through an ATM transaction after setting up a personal identification number (PIN) with your credit card issuer. Some credit card issuers also provide convenience checks that can be used similarly to checks from a bank account.
However, it’s crucial to approach cash advances cautiously and only use them as a last resort. Cash advances usually come with higher interest rates compared to regular purchases made on your credit card. These rates can quickly accumulate, resulting in significant financial burdens.
Unlike regular credit card purchases that may have a grace period before interest is applied, cash advances typically start accruing interest immediately. So, you’ll be charged interest from the moment you withdraw the cash.
5. Redeem Credit Card Rewards
If you have accumulated credit card rewards, you can try to use them towards your loan payment. Depending on your credit card, you may be able to transfer the cash rewards directly to your bank account or receive them as a check via mail. But, not everyone will have this option available, as it relies on having some credit card rewards saved.
By cashing in your accumulated rewards, you can effectively offset a portion of your loan payment, potentially reducing the financial burden. It’s a valuable strategy to make the most of the rewards you’ve earned.
When Does It Make Sense to Pay Off a Loan with a Credit Card?
Deciding whether paying off a loan with a credit card is right for you depends on your specific circumstances and motivations. While it’s generally not recommended, there are a few common reasons people consider this option:
- Difficulty Making Loan Payments: If you’re unable to make your loan payment, using a credit card might be tempting to avoid missing the monthly payment and incurring fees. However, it’s important to recognize that you would essentially be replacing one debt with another. Credit cards often have higher interest rates than loans, making it harder to pay off the balance.
- Using a Balance Transfer Credit Card: One scenario where paying off a loan with a credit card can be advantageous is when using a balance transfer credit card. However, calculate whether you can repay the debt within the introductory period first to avoid higher interest charges later on.
- Earning Credit Card Rewards: While earning credit card rewards on loan payments may seem appealing, there may be fees involved. Credit cards usually only earn rewards on purchases, not balance transfers or cash advances. Even if you use a third-party payment service, the fees incurred may outweigh the rewards earned.
Consider whether paying down your loan with a credit card will result in lower interest payments or if it will lead to paying more in the long run. This depends on factors such as the promotional period of a balance transfer card, the potential increase in APRs, and whether your credit card and loan APRs are fixed or variable.
Carefully evaluate the potential risks, fees, and long-term financial implications before deciding to pay off a loan with a credit card. Consider alternative options, such as discussing hardship programs with your lender or exploring different repayment strategies, to find the best approach for your specific situation.
Is It Better to Have a Personal Loan or Credit Card Debt?
As you weigh your options, you may also be considering using a personal loan. Personal loans typically offer lower interest rates compared to credit cards. The interest rate on a personal loan is usually fixed for the loan’s duration, ranging from 1 to 7 years, providing a structured timeline for paying off debt.
Credit cards, on the other hand, often have higher variable interest rates, which can increase over time and make repayment more challenging. Additionally, credit cards offer repayment flexibility, allowing you to make minimum payments or pay in full each month. However, only making minimum payments on a credit card can lead to a longer repayment period and higher interest charges.
Personal loans generally allow you to borrow more money, making them suitable for consolidating higher-value debts. Credit cards usually have predefined credit limits, which may not be sufficient to cover larger loan balances.
Both personal loans and credit card usage can impact your credit score. Responsible repayment of either can improve your credit score over time. However, maxing out your credit card or missing payments can negatively affect your credit score.
The Bottom Line
If you have a high-interest loan, there are scenarios where using a credit card may make it easier to pay off your balance, such as taking out a balance transfer card with a 0% promotional APR period. But do your research first and plan ahead. Otherwise, you may find yourself in a tricker financial situation down the line.