It’s no surprise that credit cards tend to reward big purchases. There are cards geared towards rewarding vacations, business needs, and even cars. However, how can credit cards help with a more common and frustrating “purchase?”
According to CollegeBoard, 55 percent of the class of 2020 graduated with student loan debt, with borrowers responsible for an average of $28,400. While there has been some relief recently, the time for repayment is once again approaching. If you’re thinking about using a credit card to pay off your student loans — yes, 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. Start to make a payment and see if paying with a credit card is an option. If so, the process is pretty straightforward. If not, you may have to use a third-party site like Plastiq or get convenience checks from your card issuer.
Once you know your options, you can strategize.
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 you through your credit or debit card. This way, you can pay large bills that usually won’t accept credit cards. This method gives you more control over your cash flow while making you able to earn rewards on your credit card on bills that wouldn’t normally be eligible.
Drawbacks: Despite being reward-eligible, services like that often charge fees with every payment. For example, Plastiq charges a 2.85 fee percent on every transaction, which can outweigh the rewards you 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: Chase Sapphire Preferred® Card. While this card only offers 1X percent back on general purchases, using it to pay off your loans can help you achieve the hefty welcome bonus — 60,000 bonus points when you spend $4,000 within the first three months of opening your card. 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 bank to avoid transaction fees altogether.
Strategy 2: Convenience checks
If you want to avoid paying third-party sites and want a more direct approach, a convenience check is a way to cut out the middleman. 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 automatical accrue the same interest rate of 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: 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 the card has a 15-month 0 percent intro APR (ongoing 16.24 percent to 27.24 variable), 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, use the 0% APR period
There are plenty of cards that offer 0 percent APR for new cardholders, meaning you won’t have to worry about interest for a limited time. Most offers last 12-18 months, but some go up to 21 months. If you don’t have the money in your bank account to immediately pay off your 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 intro APR period ends.
Best card for this method: Chase Freedom Unlimited®. The introductory APR lasts for 15 months (after that, it’s 17.24 percent to 25.99 percent variable), which is an average length. The other component of the introductory offer that brings this card to the next level is the boosted rewards rate: 3 percent cash back on all purchases for the first year. This is higher than most flat-rate cash back cards, and you will 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 that you can use towards 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.
Best card for this method: Citi® Double Cash Card. This card offers 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. There’s also a limited-time offer of $200 when you spend $1500 on purchases within the first six months, which is pretty good for a flat-rate rewards card.
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 in between them should there be any delays, from site crashes, processing delays, holidays, etc. The Discover it® Cash Back waives your first late payment, which can come in handy as you try to figure out your payment schedule.
Mix & 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 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 6 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.