How to Pay Loans, Credit Cards & Mortgages with Credit
Yes, you can pay loans and lines of credit with a credit card, but we strongly advise against doing so unless it is part of a plan that will save you money. There are three primary ways to turn this into a money-making venture: 1) if you will be able to earn enough rewards to outweigh any associated processing costs; 2) if you can take advantage of an attractive 0% balance transfer deal that will expedite your timeline to debt freedom; or 3) you are at risk of becoming delinquent on the card whose bill you plan to pay.
A notable secondary benefit for those contemplating using plastic to pay down a mortgage or auto loan is the fact that you would be effectively transforming secured debt into unsecured debt, thereby protecting your assets in the event of bankruptcy. What’s more, it’s important to note that while it is indeed possible to either pay one credit card with another or use plastic to cover the cost of a loan, doing so isn’t necessarily as simple as plugging your card number and expiration date into a website.
Such is why it is so important to learn the nuances of paying loans and lines of credit with plastic in order to make the process as efficient and inexpensive as possible.
Strategy 1: Balance Transfer
Without a doubt, if you want to make a payment toward a loan or a credit card with another credit card, a balance transfer is the best way to go about it. This option is really only worthwhile for people who have good credit. But if you fit that bill, you’re in a great position to save a lot of money.
Let’s use the national average consumer as an example. This person owes roughly $7,000 to credit card companies, so he compares 0% balance transfer credit cards in search of the best deal. He’s lucky and finds a so-called free balance transfer offer, giving him 15 months with no interest and charging neither an annual fee nor a transfer fee.
By cutting out certain luxury expenses from his budget, the average consumer is able to attribute $467 to his debt each month for 15 months, ultimately paying off amounts owed and saving him more than $1,000 as well as months of time in the process.
This process is certainly replicable, but it’s far from easy to do. You must have the requisite credit standing to qualify for a worthwhile balance transfer offer as well as the discipline and financial resources to pay off the majority of what you owe relatively quickly. Having a small remaining balance when regular rates take effect isn’t the end of the world, but you should by no means count on an attractive balance transfer deal being available when you need it a second time around.
|Credit Card||Mortgage||Auto Loan||Student Loan|
|Participating Issuers||100%||~ 50%||~ 65%||~ 65%|
|Max Suggested Transfer Amount||$10,000||$10,000||$10,000||$10,000|
|Unique Perks||Lowers credit utilization ratio.||Turns secured debt into unsecured debt.||Shifts obligation from federal government & makes debt easier to discharge in bankruptcy.|
Strategy 2: ChargeSmart or PayPal
There once were a number of different services that enabled you to pay monthly billers not accepting plastic with a credit card. Most, however, have gone out of business – including BillCharger, CardIt, WilliamPaid and Express Rewards Mortgage. The following are the best options that remain.
ChargeSmart is a service that enables you to pay most monthly bills using either a credit card or a debit card. ChargeSmart simply accepts your plastic payment, charges an intermediary fee of roughly 3%, and then makes a payment to your biller of choice via check or electronic transfer.
The main drawback of this service is that you cannot use it to pay one credit card with another. Credit card payments must be submitted with a debit card. It could, however, prove useful for those of us with mortgage, auto or student debt – as long as we first make sure to compare the overall cost to that of other payment options.
PayPal effectively enables you to turn credit into cash. You just need to open two separate PayPal accounts, linking one to your credit card and the other to your bank account. For a cost of around 2%, this will enable you to transfer money from your credit card to your bank account, which you can then use to pay off your bill.
This approach is actually quite similar to one of the primary ways in which one can purchase an investment with a credit card.
Strategy 3: Cash Advance
At WalletHub we caution against credit card cash advances due to their prohibitive cost. The average cash advance will run you about $13 in the form of a one-time fee and the amount you withdraw will immediately begin incurring interest at an annualized rate of 22%. With that warning out of the way, here’s how a cash advance could theoretically help you pay down a credit card or loan.
Credit cards enable you to take out cash advances, either in the form of a convenience check or an ATM withdrawal. You could therefore always tap one card’s cash capabilities to make a payment toward another card or loan.
This, however, only works if your credit card bills fall at different times in the month and you will be able to come up with the funds needed to pay the second lender on time.
How to Avoid Needing Credit Next Time
If you’re leveraging plastic on plastic payments due to financial difficulties, supplementing the strategies espoused above with the following pointers will only help increase your odds of lasting success. You see, avoiding a missed payment next week or getting out of debt a year from now will only be meaningful if you’re still paying your bills on time, avoiding unnecessary debt and saving money 5 or 10 years from now.
Without further ado, here are a few things to keep in mind as you swim to the surface of debt freedom:
Change Your Due Dates – Not many people know this, but issuers are happy to change your due date (to any day of the month except the 29th, 30th or 31st, since not every month includes them).
So, to improve your personal cash flow, consider changing your due date to coincide with your paycheck. This ensures your salary will actually make it to your credit card bill, as opposed to a later due date when your funds may have already been depleted by unnecessary spending. Doing so for all of your credit card bills will help with budgeting overall, enabling you to easily allocate your primary take-home to necessary expenses.
- Get the Right Accounts – Use the Island Approach for picking credit cards. If you’re having a hard time making ends meet, then you need a card that is cost-effective in financing your expenses – not a rewards card, for example. Certain cards are geared towards individuals in your shoes, after all.
The Solution May Already Be In Your Inbox: Credit card companies sometimes reserve special offers (including 0% transfer deals) for existing customers. You may not have realized this is a possibility, but that’s probably because you typically have to call (or check your spam folder) to know about these offers.
So, put your people skills to work and see what your bank has to offer. It can’t hurt, after all, and it may be your best option if time is of the essence.
- Borrow From Family or Friends: Check to see if any relatives or close friends are comfortable footing your credit card bill this month. Only do so if you’re absolutely sure you can provide repayment soon – after all, you don’t want to burn bridges with anyone. You can even draft an official promissory note and offer to pay a reasonable interest rate (just not higher than your credit card charges!).
- Ask for an Advance on Your Paycheck: Asking your employer for an earlier paycheck is a little tricky, but it can be a viable option for certain people, depending on their job situation. Ask yourself how good your work performance is, how long you’ve been at your job and how reasonable your employer can be. If your circumstances warrant an advance, then perhaps it’s worth a shot to request one.
Image: artenot / Shutterstock
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