Are you drowning in student loan debt and struggling to make ends meet? You may be wondering if you can pay student loans with a credit card.
Although tempting, weigh the potential benefits and risks of paying off your student debt using a credit card.
This article will explore the pros and cons of using credit cards to pay off student loans and offer some tips on how to navigate this option if you decide to go for it.
Can You Pay Off Student Loans With a Credit Card?
Yes, it is possible to pay off student loans with a credit card, but it depends on the policies of the loan provider and the credit card issuer.
Some student loan servicers may allow credit card payments, while others may not. Additionally, even if a student loan provider does accept credit card payments, consider the potential drawbacks of using a credit card to pay off student loans, such as high fees and interest rates.
In most cases, paying off student loans with a credit card is not recommended, as other repayment options may be more cost-effective. Let’s first take a look at some of the risks.
The Risks of Paying Off Student Loan With a Credit Card
Paying off student loans with a credit card may seem like an appealing option at first, but it comes with several risks that should be carefully considered. Here are a few potential risks to keep in mind:
High-interest rates: Credit cards typically have much higher interest rates than student loans, making it very expensive to pay off student debt using this method. If you cannot pay off the balance in full each month, the interest charges can quickly add up.
Fees: Many credit cards charge fees for balance transfers, which could add to the overall cost. Additionally, some credit cards may charge annual fees or other charges that could further increase the cost of using a credit card for this purpose.
Credit score impact: Using a credit card to pay off student loans could negatively impact your credit score if you’re unable to make payments on time. It could also negatively affect your credit score if you use a large percentage of your available credit. This could make it harder to get approved for credit in the future or result in higher interest rates for loans or credit cards.
Risk of falling deeper into debt: If you can’t pay off the balance on your credit card each month, you could fall deeper into debt. This could make it harder to pay off your student loans in the long run and could harm your overall financial health.
The Rewards of Paying Off Student Loan With a Credit Card
Before considering using a credit card to pay off student loans, note that this strategy may not benefit everyone.
While it may be advantageous when the student loan amount is low, using a credit card to pay off large sums is generally not recommended as it may not come with any benefits.
With that in mind, let’s take a look at a few rewards:
Earn credit card rewards: Depending on your card, you can earn cash back, credit card points, or miles on your student loan payments. This could be a nice perk if you’re someone who pays off their balance in full each month and wants to maximize their rewards.
Take advantage of 0% APR promotions: Some credit cards offer 0% APR promotional periods, which means you won’t accrue any interest on your balance during that time. If you plan to pay off your student loans quickly and can do so during a 0% APR period, this could save you money in interest charges.
Potentially improve your credit score: Paying off your student loans with a credit card could improve your credit utilization ratio, which is a factor that makes up 30% of your credit score. The credit utilization ratio measures how much credit you’re using relative to your available credit limit. It’s calculated by dividing your total credit card balances by your total credit card limits, expressed as a percentage. Keeping your credit card balance low compared to your credit limit can improve your credit score.
Consolidate debt: If you have high-interest credit card debt in addition to your student loans, you may be able to consolidate both types of debt onto a single credit card with a lower interest rate. This could make managing your debt easier and save you money on interest charges.
How to Pay Student Loans With a Credit Card?
So you’ve decided to go with a credit card after all. Here are some general steps to follow if you’re considering paying off your student loans with a credit card:
Check with your student loan servicer if they accept credit card payments. You can typically find this information on their website or by calling customer service. If they accept credit card payments, ask if any fees or restrictions are associated with making a payment in this way. Some loan servicers may charge a convenience fee, which could negate any rewards or benefits you may earn from using a credit card.
Decide between credit card types. Look for a card with a low-interest rate and a rewards program that aligns with your financial goals. For example, if you want to earn travel rewards, consider a card offering bonus miles or points for every dollar spent. If you’re trying to pay down debt, look for a card with a low or 0% introductory APR on balance transfers.
Consider using a balance transfer credit card. This can help you avoid high-interest rates. However, be aware that balance transfer cards may come with balance transfer fees, typically around 3% to 5% of the amount transferred. Additionally, make sure to pay off the balance transfer before the introductory APR period ends to avoid high-interest charges.
Make sure you have enough available credit. Keep in mind that using a large percentage of your available credit can negatively impact your credit score, so try to keep your credit utilization ratio below 30%.
Set up automatic payments to ensure you don’t miss a payment and incur late fees. You can set up automatic payments from your checking account or debit card. Just make sure to check your credit card statement each month to ensure the payment was processed correctly.
Paying off student loans with a credit card can be expensive due to high-interest rates and fees. However, if used responsibly for small sums, you can unlock rewards like cash back or credit card points.
To make the most of this strategy, ensure timely, full payments so you don’t negate those rewards with added charges. And don’t forget to carefully review the terms of your credit card and student loan provider and set up automatic payments to maintain a seamless process.
Financial AdvisorDaniel Brown is an experienced and knowledgeable financial advisor at spoolah.com. He has been in this industry since 2008 and has a strong understanding of economic trends, all types of financial planning, ways of creating plans for meeting short-term and long-term financial goals, etc.