Should you pay off your student loans with a credit card? If a credit card company offers a 0% introductory APR or other attractive perks, you might be tempted to do so. However, there are both risks and benefits to using your credit card to pay back your education loans. You’ll want to carefully weigh all of your options in order to choose a repayment method that makes the most sense for your financial circumstances. Below, we’ve listed some of these risks and benefits, to help inform you in your decision!
Risks of paying student loans with a credit card
- Fees and charges can snowball quickly. The Consumer Financial Protection Bureau (CFPB) advises against making credit card payments for these loans: “Don’t replace student debt with credit card debt — it can be a much more expensive way to finance your education.” If you only make the minimum payment or otherwise do not pay the full balance of your credit card each month, your credit card debt will accrue. Additionally, credit cards typically have higher interest rates than education loans. If your credit card doesn’t have a 0% APR, the interest charges will increase the debt as well. These charges could build up rapidly, so you risk accruing even more debt in the process of making these student loan payments with your credit card.
- You could jeopardize your credit score. Having a good credit score is important. Many companies check your credit, from insurance companies, mortgage lenders, landlords, and even some employers. Having a large debt on your credit card might skew your credit utilization ratio so that you are above the 30% credit usage recommended by the CFPB, which could cause your credit score to drop.
- You forfeit potential tax benefits. If you have an eligible loan, you might qualify for tax breaks based on the interest payments that you make. This tax break allows you to deduct the lesser of $2,500 or the amount of interest you actually paid for the year. Interest paid on credit cards, however, are not tax-deductible.
Benefits of paying student loans with a credit card
Credit cards are convenient in part because they allow you to pay for your expenses without immediately spending money from your bank account, which can be useful in situations where you’re strapped for cash but still want to keep up with your bills and expenses. This could be a major motivator to include education loan payments in your routine credit card expenses.
The benefits of paying your student loan with a credit card will mostly depend on the rewards that the credit card offers. When you make the loan payments, you could earn cash back, miles, or points, just as you would for dining, gas station, grocery, and other purchases. You could then use your cash back to make additional payments on your education loans. Therefore, if you’re disciplined and strategic with your credit card payments, you might be able to pay down your education loans more quickly.
The bottom line
Ultimately, the choice of whether to pay these loans with your credit card should be based on what is best for you, given your circumstances. Take the time to review all your options to make sure that you are making an informed decision. Climb wants to provide its borrowers with flexibility, and the choice to pay back their loans through the methods that work best for them.