If you are considering this option, you need to do the math and make sure you're really saving money. Otherwise, you might just be shifting your debt from one place to another.
Credit cards! What can’t they do? They let you shop online. They can open locked doors. And they can build up your credit if you use them properly. But can they be used to pay off a personal loan? And even if you can use them to pay off a personal loan, should you?
These are the questions you will have answered over the course of the next few minutes you spend reading this blog post.
Here’s how credit cards work.
You probably understand on a basic level that a credit card is an object that lets you buy something now and then pay for it later. What you may not realize is that every time you use a credit card, you’re essentially taking out a loan.
Every time you use a card to make a purchase or to take out a cash advance, you are adding money to your card’s balance. That balance then earns interest until it is paid off. You can spend up to your credit limit, but paying off your balances means that you can re-use that space on your card. This model is called a “revolving balance.”
Unlike most loans, standard credit cards come with a 30-day grace period. That means interest won’t start accruing until one month after the amount is added to your card. So if you pay your bill in full before that grace period expires, instead of just paying the monthly minimum amount, you’re essentially getting an interest-free loan.
And it’s a loan that builds up your credit score! If your credit score isn’t good enough to qualify for a regular credit card you can get a secured credit card by putting down some cash as collateral. The rates will probably be better than the rates for a bad credit loan—even if the right loan can also help build your credit score.
But can a credit card be used to pay off a personal loan?
Yes, a credit card can pay off a personal loan.
Well, at least in some cases.
“You can use a credit card to pay off a personal loan,” advised personal finance writer and credit card expert Ben Luthi. “Some credit card issuers will allow you to do it directly through your online account like any other balance transfer.
“If your issuer won’t allow you to do it directly through their balance transfer tool, you can request credit card convenience checks instead. Some issuers even send these out unsolicited. You can write the check to your personal loan company or write it to yourself and deposit it into your checking account then make the payment.”
Essentially, if you have a standard credit card, and you want to use it to pay for a standard personal loan, you’ll probably be able to do so—as long as the loan amount is within your credit limit.
Make sure you’re actually saving money.
As too many scientists at the beginning of that horror movie should have reminded themselves: Just because you can do something, doesn’t mean you should. So should you pay off your personal loans with a credit card?
It depends. Obviously, there are upsides, like the fact that your personal loan will be paid off. But as we said above, since a credit card is essentially a loan, is that really an upside at all?
And then there are the drawbacks …
“The main drawback to doing this is that you’ll typically pay a balance transfer fee, which can be anywhere from 1% to 5%, depending on the card and if there’s a promotional offer,” warned Luthi. “Also, credit cards charge a lot higher interest rates than some of the best personal loans, so I’d only recommend considering it if your personal loan interest rate is higher than your credit card interest rate.”
If you have a credit card and are dealing with high-interest debt from a no credit check loan like a payday loan or title loans, then transferring that debt to your card will almost certainly save you money. But with traditional loans, it may not work out as well.
When paying down debt, you need a plan.
Sha’Kreshia Lewis, CEO of Humble Hustle Finance shared her own story of using a credit card to pay off a personal loan: “You can use a credit card to pay off a personal loan but it may not be the wisest thing to do. It is important to weigh your options and run your numbers before making a decision.
“Speaking from personal experience, I used my credit card to pay off my last couple of payments on my personal loan. The balance on my credit card was at $0 and I paid the credit card off before the month ended. I saved on interest because I paid the loan off before term and I paid the credit card off before any interest accrued.
“It made a huge positive impact on my credit because the loan was paid off in full. The credit card company did not report it to the credit bureau that my balance went up because I paid it off before their next report date came around.”
As Luthi said, it pretty much comes down to whether you’ll be saving money or not. If you can use your credit card to pay off the loan without paying any additional interest or fees, why not? But otherwise, it’s not going to be a good idea.
We’ll leave you with this last bit of advice from Lewis: “Be financially disciplined. One late payment could have you deeper in debt than you were before. It may make more sense to refinance a loan with a lower rate than to put it on a credit card with higher interest.”
Sha’Kreshia Lewis is an AP Clerk in the oil and gas industry. After 6+ years experience in the financial field, she has set out on her own to passionately help others. She is the founder and CEO of Humble Hustle Finance, a financial platform educating emerging adults on the importance of money management.
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