Can You Pay Your Student Loans With A Credit Card?
Learn more about how to pay off your student loans and if it is best to use your credit cards through our guide. Examine the pros and cons of using your credit card to pay off your loans.
Table of Contents
- Which Loans Apply for Credit Card Payment?
- Pros & Cons of Paying Loans with a Credit Card
- Student Loan Payment Alternatives
- Final Thoughts
As much as student loans are very beneficial for easing education finances, the manner in which you decide to pay them off is something you need to consider carefully before signing off. Using credit cards to settle your debt comes as the one of the most obvious means of doing this, but you first need to examine the viability of this route by finding out if your loans apply for this method of payment.
Which Loans Apply for Credit Card Payment?
If you have federal loans, then unfortunately it is not possible to pay them off with a credit card. Federal loans have regulations that prohibit individuals from settling student loan debt with a credit card. For those who have private loans, on the other hand, there is a possibility for the loans to be paid with a credit card but it’s important to consider the pros and cons involved with this route of payment.
Pros & Cons of Paying Loans with a Credit Card
Consider the following benefits and potential drawbacks of paying off your student with a credit card.
Credit cards in general make payment easy and are therefore a convenient way of paying for things. When it comes to private student loans, a credit card can be used to pay the amount due without you necessarily having that money at hand. Transferring your student loan to a credit card may help you get a minimum balance offered and availed to you to meet your current financial goals and needs.
- Potential rewards:
Borrowers get various rewards after using a credit card to pay off their private student loans. Most financial institutions offer relief on interest rates being charged to their borrowers’ credit cards. Using a credit card with an introductory Annual Percentage Rate (APR) of 0% will help you save on the extra charges. This will help you to avoid incurring any interest charges in the short -term. The one year of not paying interest may spare your pockets, helping you save on the interest rates.
- Improvement in credit score:
Making payments through a credit card helps to improve your credit score, so paying off a private student loan in the samw way isn’t any different. By paying your balances in full and on time every month, you build strong credit. Paying the full balance instead of consistently having a balance on your card will help you establish a good credit score, which is beneficial in giving you access to more loans in the future.
- High fees:
Using a credit card to pay off your loans will see you incur extra costs such as high processing fees, high-interest rates, and hefty penalties. Any amount of money you move to your credit card is most likely to be charged at the highest APR. When your introductory window period expires (most run for the first 12–18 months), a higher APR is applied against your entire balance. If borrowers are not able to pay off the balance by the end of the 0% APR period, they are faced with hefty charges that result from imposed penalties and interest rates.
- Potential for credit score damage:
Paying off your student loans with a credit card can damage your credit score in two ways. First, your credit score can drop. Moving your student loans to a credit card reduces your credit card utilization ratio. A credit card utilization ratio affects the credit score by up to 29% and this reduces the overall credit score. Secondly, late payments or failure to settle the balance will affect your credit score in a negative way. Remember: Lenders are more likely to lend you money and offer you good rates if you have a good credit score.
- Higher debt:
The interest rates charged on credit cards is high and even higher than the one on student loans. Using a credit card to pay the debt does not help to reduce what you owe, but most of the time it actually sends you deeper into financial bondage. Paying student loans with a credit card means that you are just shifting the debt from one place to another.
Student Loan Payment Alternatives
There are alternative ways to settle your student loan debt. Take a look at the options below.
1# Paying the loan servicer directly
One of the best ways to pay off student loans is by paying the funds back directly to the loan servicer. For any income you get through part-time or full-time employment, always ensure that you subtract a fraction of it to pay your loan servicer. Enroll for automatic payment options to help you qualify for discounts, and take advantage of the benefits attached to timely automatic monthly payments. Remember: Every time you pay directly to your loan servicer, you reduce your debt and eliminate penalty charges that may be charged to your loan.
2# Automatic debit payments
Automatic debit payments will help make it easier to withdraw money from your checking account and send it to your loan servicer as agreed by both the lender and borrower. You’ll need to authorize this automation by setting up the amount you need to be deducted and at what monthly intervals. With automatic debit payments, you won’t have to worry about missing payments, and they’ll always be in on time. This option can help you pay off a significant part of your loan in a timely manner by giving allowance to money transfers for larger amounts.
3# Refinancing of student loans
If you have a good credit score, you can qualify for loan refinancing. Refinancing helps you get a new loan altogether to pay off your existing student loans. With this option, you qualify for lower rates on your new loan and extended repayment terms. Refinancing your student loans doesn’t mean that you pay fewer monthly payments, but it helps you reduce the amount you would have incurred in interest, thus helping you to save more. This option is best applied to private loans, as refinancing federal loans turns them into private loans.
Why shouldn't I use my credit card to pay student loans?
Most lenders do not accept loan payments from their borrowers using a credit card. For federal loans, credit card payments are not even an option as federal regulations prohibit the use of a credit card to pay off student loans.
Does my credit score improve if I pay student loans with a credit card?
Your credit score might improve if you a) pay student loans with a credit card and b) if you make timely payments and never fail to make any payment (for the sake of credit history). The credit score may drop as paying loans through a credit card reduces your credit utilization ratio.
Is it illegal to pay student loans with a credit card?
While it is not illegal to pay student loans with a credit card, federal student loans prohibit credit card usage as a means of paying off student loans. Private student loans also do not accept payment through credit cards but borrowers can get past this by using third parties to help make payments on their behalf or using a balance transfer check.
The student loan repayment process can be nerve-racking and could be met by many unforeseen circumstances that can affect one’s financial capability. Borrowers can use credit cards to pay off private student loans if they have exhausted all avenues of paying back the loan. Using a credit card to pay student loans has its advantages and its setbacks, offering little protection compared to the student loan itself, which in turn could leave you more exposed to extra charges and penalties. Whether you choose to pay off your student loan with a credit card or the alternatives, the choice you make should be aimed at streamlining your finances without jeopardizing your credit score or finances. Before using a credit card to pay off your student loan, ensure that you weigh the advantages and disadvantages to determine how much it will cost you in the long term.