Can you pay off a loan with a credit card? Is it possible, or is it some creative accounting that will come back to haunt you sooner rather than later?
Most people use a loan to pay off credit cards – not the other way around. However, the answer to the question is yes, you can pay a loan with a credit card. But you need to do plenty of research before you do.
If you don’t follow the correct steps, you could end up in a debt that seems even more immovable than the loan you had in the first place.
Are you thinking about trying this technique? Here’s what you need to know.
1. The Transaction Type Varies
You can’t just pay off a loan with a credit card. There won’t be a space on your loan payment form to enter your credit card details because loan servicers don’t like accepting credit cards.
Accepting credit cards costs your loan provider much more money than direct debit or an ACH transfer.
Rather than handing over your credit card, you will likely need to use the balance transfer option.
If you have a personal loan and a credit card from the same bank, then your bank may allow you to transfer the balance between the two accounts online.
If you can’t transfer the balance, then you can ask your credit card servicer to send you a convenience check. These allow you to write out a check to yourself or the personal loan servicer and then use it to pay off the loan.
Whatever you do, you should avoid using a cash advance to pay off the loan. A cash advance comes with a much, much higher interest rate than a balance transfer. What is more, you usually start paying interest on the cash advance the minute it leaves your account, so it doesn’t matter if you pay the card off before the payment is due.
2. Calculate the Costs Before You Make the Transaction
The reason that paying a personal loan with a credit card isn’t more common is that it is expensive. You only save money in very specific circumstances.
All the transaction types will cost you serious money, even with promotional interest offers.
For example, if you use a balance transfer, then you’ll pay the balance transfer fee. These are rarely fixed fees and instead represent as much as 5 percent of the amount you transfer.
If you use a convenience check or your credit card servicer considers it to be a cash advance, then not only will the fees be higher, but the interest rate will be astronomical as well.
You want to pay off the credit card quickly – or within the promotional offer timeline – or you will pay far more than if you had made payments on your loan.
3. You Need a Debt Payment Plan
Remember that paying off a loan with a credit card only transfers the debt. It doesn’t eliminate it. And credit cards usually come with higher interest rates, so you do need to pay off the card strategically.
In an ideal world, the best way to use a credit card to pay off a loan is to transfer the balance of the loan to the card and then pay it off before the end of your statement.
When you do this, your loan provider will report your loan as paid off, and your credit card company won’t report your debt because it didn’t carry over between statements. Then, your credit score will go up, too.
Here’s One Potential Strategy
Do you want to do a balance transfer, but you can’t get a balance transfer card with your loan in place?
One strategy might include transferring your loan to your current credit card and then applying for a balance transfer card with a 0 percent introductory interest rate. Then, you can rollover the credit card that now contains your loan before interest accrues, and the credit card company reports it.
Your loan provider will report your loan as paid off, but your credit card company won’t apply a new balance – yet.
You will still pay the balance transfer fee. However, it is a possible way to get around the interest and help you get credit products you couldn’t access when you had the loan.
Keep in mind that the strategy isn’t guaranteed to work. You will take the risk of a rejection on the balance transfer card. However, you may be able to reapply after making a few payments on the balance on your credit card.
4. Consider a Refinance Instead
Rather than heading straight for a higher-risk credit product, why not ask the lender if you can refinance the loan? If successful, refinancing allows you to lower your interest rate. It will save you money on your monthly payment and over the long-run, too.
Refinancing is a particularly good idea if you have a high fixed interest rate or a variable APR that isn’t serving you well.
Refinancing also restarts your term based on your current principal. So, you extend the life of your loan, which gives you more time to pay it in full when you have the cash in hand. Essentially, it removes the ticking countdown clock that comes with a balance transfer to a credit card.
Can You Pay Off a Loan with a Credit Card? Yes
So can you pay off a loan with a credit card, or is it just creative, high-risk accounting?
The answer is yes, but you need a solid plan to pay off the credit card debt before the balance transfer.
If you’re going to pay the 5 percent balance transfer fee, you should save money in the long run. Otherwise, it may be more prudent to continue to make payments on the loan. If you want to use your credit card to make a loan payment – not the whole loan – ask your credit card issuer for convenience checks and stick to a single payment.
Are you looking for more helpful financial advice? Read our post on seven simple tips for better budget management.