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It’s not exactly news that credit cards tend to reward big purchases. There are cards geared toward rewarding vacations, business needs and even cars. But can credit cards help with one of early adulthood’s most frustrating expenses?
According to student loan data, nearly 60 percent of U.S. adults have put off a major financial decision due to their student loan debt. And while there has been some relief in recent years, interest on student loans will resume on September 1 and payments are due beginning in October. If you’re thinking about using a credit card to pay off your student loans, it is possible, but it only makes sense for specific situations.
Before you go this route, take a moment to read up on the risks that come with paying off student loans with a credit card, like losing your federal protections or tacking on a higher interest rate to your debt. If you decide the benefits outweigh the risks, here’s how to do it.
First: Determine whether you can make loan payments directly with a credit card
Most loan servicers require payments to come from a bank account, making it difficult to pay with a credit card. Log in to your student loan account and navigate to your payment options. Begin to make a payment and check to see if paying with a credit card is an option. If not, consider the following:
Strategy 1: A third-party service
While the middleman often gets a bad rep, this one can actually work in your favor. When you pay for your student loans via a third-party site, it allows you to pay the recipient with their preferred method (check, bank transfer or wire transfer) while charging your credit or debit card. This way, you can pay large bills that usually won’t accept credit cards. Not only does this method give you more control over your cash flow, but it also allows you to earn rewards on bills that wouldn’t normally be eligible.
Drawbacks: Despite the ability to earn rewards, these services generally charge fees for every payment. That can outweigh any rewards you might earn on the purchase. You also need to be aware of the different processing times of the payment method your loan service accepts and plan accordingly.
Best card for this method: The Chase Sapphire Preferred® Card. While this card earns a modest amount on general purchases, using it to pay off your loans can help you achieve a hefty welcome bonus. This could turn into a statement credit that you can use to pay off your balance. You can also use the bank-to-bank transfer option with Chase to avoid transaction fees altogether.
Strategy 2: Convenience checks
If you want to avoid paying third-party sites and take a more direct approach, consider a convenience check. Similar to a personal check, it allows you to use the available balance on your credit card and can be made out directly to the receiver. You can use it anywhere regular checks are accepted, and it’s a good way around the no-credit-cards barrier that most student loan services have. It may also process faster as it does not have to go through another service.
Drawbacks: Proceed with extreme caution. Convenience checks automatically accrue the same interest rate as cash advances, which can be 29 percent or higher. You should only use this strategy if you have the cash on hand to immediately repay the charge and simply want to earn rewards.
Best card for this method: The Blue Cash Everyday® Card from American Express. American Express has the best customer service among all credit card issuers, so if you run into a problem with your convenience checks (receiving, using, processing, etc.), the experience should be painless. Although this card has an introductory 0 percent APR on purchases and balance transfers for 15 months from the date of account opening (19.24 percent to 29.99 percent variable APR after), that offer won’t apply to convenience checks.
Credit card payoff strategies
Once you know how to make a student loan payment with a credit card, you’ll want to consider your payoff strategy. Are you going to charge a large portion of your loan balance to a credit card? Or do you plan to continue with small, fixed payments each month?
For a large charge, take advantage of a 0% intro APR offer
There are plenty of cards that offer a 0 percent intro APR for new cardholders, meaning you won’t have to worry about interest for a limited time. Most offers last from 12 to 18 months, but some go up to 21 months. If you don’t have the money in your bank account to immediately pay off a charge, this is the option for you.
Drawbacks: While most intro APR cards have interest rates that are around the national average, credit card APRs tend to be higher than student loan APRs. You want to be sure you can pay your loan in full before the 0 percent intro APR period ends.
Best card for this method: The Chase Freedom Unlimited®*. The introductory 0 percent APR lasts for 15 months on both purchases and balance transfers, followed by a 20.49 percent to 29.24 percent variable APR. The other component that brings this card to the next level is its welcome offer: Through Bankrate, you can earn an additional 1.5 percent cash back on top of all your purchases’ original cash back rate (on up to $20,000) for the first year. This boosted offer makes for higher rewards categories than most flat-rate cash back cards, and you’ll receive this benefit for the majority of the intro APR offer.
For small, recurring charges, use a flat-rate card
For those who plan on using a credit card to chip away at their balance over time, a flat-rate cash back card may be your best tool. Most rewards cards would only offer 1 percent cash back on student loan payments, since student loans don’t fall into traditional bonus categories, but flat-rate cards will offer 1.5 to 2 percent. Some even come with a welcome offer that you can redeem as a statement credit and use toward your balance.
Drawbacks: This option is primarily for those who are set on making fixed payments over time and want to earn rewards along the way. If you’re looking to move your entire loan balance out of your loan account and into a credit card account, it’s better to focus on finding a 0 percent introductory APR offer.
Best card for this method: The Citi® Double Cash Card. This card offers up to 2 percent cash back on all purchases — 1 percent when you make the purchase and 1 percent when you pay for it. This setup can incentivize you to pay your balance.
Playing the calendar game
Timing is everything, and you can use it to your advantage. For most cards, you can change your payment due date, and many make the default on the 28th of the month. Use this to your advantage by setting your due dates for your loans and card at least two weeks apart. By doing this, you give yourself a safety net. Should an unexpected expense come up, you have time to recalibrate your budget. This can also give you a paycheck between deadlines, giving you more flexibility in your budget.
If you’re someone that tends to confuse dates or be forgetful, this method may not be the best. If the window is too large, it may be better to place your due dates closer together. However, you should leave a few days between them to allow for delays from site crashes, processing time, holidays, etc. The Discover it® Cash Back waives your first late payment (After that, up to $41), which can come in handy as you try to figure out your payment schedule.
Mix and match
Who says you need to stick to one way of paying off your loans? You can mix and match methods as needed as the end goal stays the same. Look at your current spending habits and determine from there the best debt repayment method for you. Tried out a flat-rate card for a few months and it doesn’t reward you enough? Switch to a 0 percent intro APR card. Tired of third-party site fees? Go for convenience checks. At the end of the day, you’re the one who has to repay the student loans, so find what works best for you.
While it’s important to find a payment strategy that works for you, you don’t want to open too many credit cards in a short window or complicate your repayment plan. Make sure to look for preapproved cards to avoid a hard inquiry on your credit card and wait at least six months to a year before opening another. Also, don’t let curiosity or hearsay get the best of you. If you find a strategy that works with your budget and schedule, stick with it. If you want to switch, make sure to do your research.
The bottom line
It’s imperative to mention that paying off your student loan debt with a credit card is high risk, high reward. There are a few potential advantages, but also significant drawbacks. If you do decide it would be worth it to pay your loans off with a credit card, come up with a plan that works for you and is as stress-free as possible. Keep in mind that you can also explore other alternatives to help clear your debt.
*The information about the Chase Freedom Unlimited® has been collected independently by Bankrate.com. The card details have not been reviewed or approved by the card issuer.