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Key takeaways
- Using a credit card to pay off a loan can lead to additional costs and further debt accumulation if not managed properly.
- Paying a loan with a credit card should be considered carefully. It can be beneficial for earning rewards or managing cash flow temporarily, but it can also end up costing you.
- Choose a balance transfer card with low fees or a 0% APR. Be sure to pay off your balance before the promotional period ends to avoid high interest charges.
It can be tempting to pay a loan with a credit card. Perhaps you want to earn rewards. Or maybe you want to take advantage of your new card’s 0% APR offer. You get to save on interest payments and reduce the cost of your loan at the same time!
Paying your loan with your credit card might seem like the perfect solution. But if you’re not careful it could end up costing you even more in the end.
Here’s what you should consider if you’re thinking of paying off your loan with a credit card.
Transfer Your Loan to a Low-Interest Credit Card
If you want to transfer your loan to a credit card you’ll need to get a balance transfer card. These cards often come with promotional low-intro APRs. These promotional rates can be as low as 0%.
The strategy is to transfer the debt from your current higher-interest loan onto your zero-interest credit card, reducing the interest you’ll pay.
The biggest caution here is that you must pay off the loan before the low-intro APR period ends – typically after 12 to 15 months. After that the APR will shoot up into the double digits, probably higher than what you were paying in the first place.
Check Credit Card Transfer Fees
Before you leap into this debt restructuring strategy, you need to understand the costs involved.
Most credit card companies charge a balance transfer fee, which is typically between 3% to 5% of the total amount transferred. This fee adds to your overall debt.
Calculate whether the interest savings you gain during the promotional period outweigh the fees charged.
Look Out for Early Repayment Charges
Some loans come with early repayment penalties. Lenders impose these charges to recoup some of the interest they lose when you pay off a loan early.
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Review the terms of your loan agreement to see if such penalties apply and if they do, factor these into your cost-benefit analysis.
Avoid Card Purchases
A lot of balance transfer credit cards will only apply the promotional 0% or low-interest rate to the balance you transfer. They are unlikely to apply the low-interest rate to any new purchases made with the card.
Avoid using the credit card for any additional purchases since your primary goal is to reduce debt, not accrue more.
Be Aware of When the Promotional Period Ends
The introductory 0% or low interest rate on balance transfer cards is temporary and the interest rate when it ends is often high. So be sure to pay off the balance in full before the promotion ends to avoid incurring any extra costs.
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Final Thoughts
Before deciding to pay off a loan with a credit card, it’s important to consider your financial situation holistically. Balance transfers can be a smart strategy to save on interest, but they’re not a one-size-fits-all solution.
Budget carefully, read the fine print, and ensure you’re not simply moving debt around without making progress toward paying it off. Consulting with a financial advisor can also provide personalized advice to help you manage your debt responsibly.
