It should come as no surprise that credit cards tend to reward large purchases. There are cards designed to reward vacations, business needs, and even automobiles. But how can credit cards assist with a more common and aggravating “purchase?”
According to a Bankrate survey, seven out of ten Gen Z and millennial student loan borrowers have delayed making a major financial decision due to student loan debt. While there has been some relief recently, the repayment deadline — June 2023 — is rapidly approaching. It is possible to pay off your student loans with a credit card, but it only makes sense in certain circumstances.
Before you go this route, educate yourself on the risks of paying off student loans with a credit card, such as losing federal protections or incurring a higher interest rate. Here’s how to proceed if you decide the benefits outweigh the risks.
First: Determine whether you can pay your loan with a credit card
Most loan servicers require payments to be made from a bank account, making credit card payments difficult. Log in to your student loan account and go to the payment options page. Begin making payments and see if using a credit card is an option. If this is the case, the procedure is fairly simple. If not, you may be forced to use a third-party site such as Plastiq or obtain convenience checks from your card issuer.
The first strategy is to use a third-party service
While the middleman is often maligned, in this case, he can actually work in your favor. When you pay for your student loans through a third-party site, you can pay the recipient using their preferred method (check, bank transfer, or wire transfer) while charging yourself using your credit or debit card. This allows you to pay large bills that normally do not accept credit cards. This method gives you more control over your cash flow while allowing you to earn credit card rewards on bills that would otherwise be ineligible.
Drawbacks: Despite being reward-eligible, such services frequently charge fees with each payment. Plastiq, for example, charges a 2.85 percent fee on every transaction, which can outweigh the rewards earned from the purchase. You should also be aware of the various processing times for the payment methods accepted by your loan service and plan accordingly.
The Chase Sapphire Preferred® Card is the best card for this method. While this card only offers 1X percent back on general purchases, using it to pay off your loans can help you earn the hefty welcome bonus — 60,000 bonus points after spending $4,000 in the first three months of opening your card. This could result in a statement credit that you can apply to your balance. You can also avoid transaction fees by using the bank-to-bank transfer option with Chase.
Strategy 2: Checks for convenience
A convenience check is a way to cut out the middleman if you want to avoid paying third-party sites and take a more direct approach. It works similarly to a personal check in that it uses the available balance on your credit card and can be made out directly to the recipient. It can be used anywhere regular checks are accepted, and it’s a good way to get around the no-credit-cards restriction that most student loan services have. It may also process faster because it is not routed through another service.
Drawbacks: Exercise extreme caution. Convenience checks are subject to the same interest rate as cash advances, which can be as high as 29 percent. This strategy should only be used if you have the cash on hand to immediately repay the charge and simply want to earn rewards.
The American Express Blue Cash Everyday® Card is the best card for this method. American Express has the best customer service of any credit card company, so if you have a problem with your convenience checks (receiving, using, processing, etc.), the process should be simple. Although this card has a 15-month introductory 0% APR on purchases and balance transfers (18.24 percent to 29.24 percent variable APR after that), it does not apply to convenience checks.
Methods for repaying credit cards
After you’ve figured out how to make a student loan payment with a credit card, you should think about your repayment strategy. Will you charge a significant portion of your loan balance to a credit card? Or do you intend to continue making small, fixed monthly payments?
Use the 0% introductory APR period for a large charge
There are numerous cards that offer a 0% intro APR for new cardholders, which means you won’t have to pay interest for a limited time. Most offers are valid for 12 to 18 months, but some are valid for up to 21 months. If you don’t have enough money in your bank account to pay off your charge right away, this is the option for you.
Drawbacks: While most intro APR cards have interest rates that are comparable to the national average, credit card APRs are typically higher than student loan APRs. You want to ensure that you can repay your loan in full before the 0% intro APR period expires.
The Chase Freedom Unlimited®* is the best card for this method. The introductory 0% APR on purchases and balance transfers is valid for 15 months (followed by an 18.74 percent to 27.49 percent variable APR), which is an average length. The boosted rewards rate is another component of the introductory offer that elevates this card to the next level: For the first year, Bankrate offers an additional 1.5 percent cash back on top of the original cash back rate on all purchases (up to $20,000). This boosted offer provides higher rewards categories than most flat-rate cash back cards, and you’ll get this benefit for the majority of the intro APR period.
Use a flat-rate card for small, recurring charges
A flat-rate cash back card may be the best tool for those who intend to use a credit card to gradually reduce their balance. Because student loans do not fall into traditional bonus categories, most rewards cards will only offer 1 percent cash back on student loan payments, but flat-rate cards will offer 1.5 to 2 percent. Some even include a welcome offer that can be redeemed as a statement credit and applied to your balance.
Drawbacks: This option is primarily for those who are committed to making fixed payments over time while also earning rewards. If you want to transfer your entire loan balance from your loan account to a credit card account, you should look for a 0% introductory APR.
The Citi® Double Cash Card is the best card for this method. This card provides up to 2% cash back on all purchases — 1% when you make the purchase and 1% when you pay for it. This arrangement may encourage you to pay your balance.
Other suggestions
Taking part in the calendar game
Timing is everything, and you can take advantage of it. Most credit cards allow you to change your payment due date, and many set the default to the 28th of the month. Use this to your advantage by spacing your loan and credit card due dates by at least two weeks. You are creating a safety net for yourself by doing so. If an unexpected expense arises, you will have time to adjust your budget. This can also provide you with a paycheck in between deadlines, giving you more budget flexibility.
This method may not be suitable if you have a tendency to mix up dates or are forgetful. If the window is too large, consider moving your due dates closer together. However, you should leave a few days between them in case of site crashes, processing delays, holidays, and so on. The Discover it® Cash Back waives your first late payment, which can be useful as you work out your payment plan.
Combine and contrast
Who says you have to stick to one method of repaying your loans? As long as the end goal is the same, you can mix and match methods as needed. Examine your current spending habits to determine the best debt repayment strategy for you. Have you tried a flat-rate card for a few months and found it to be insufficiently rewarding? Change to a card with a 0% APR. Tired of paying third-party website fees? Choose convenience checks. After all, you’re the one who has to repay the student loans, so figure out what works best for you.
While it is critical to find a payment strategy that works for you, you should avoid opening too many credit cards in a short period of time or complicating your repayment plan. To avoid a hard inquiry on your credit card, look for preapproved cards and wait at least six months to a year before opening another. Also, don’t let curiosity or hearsay take over. Stick with it if you find a strategy that works for your budget and schedule. If you want to change, make sure you do your homework.
In conclusion
It goes without saying that paying off your student loan debt with a credit card is a high-risk, high-reward strategy. There are a few potential benefits, but there are also significant drawbacks. If you decide it is worthwhile to pay off your loans with a credit card, devise a plan that works for you and is as stress-free as possible. Remember that you can also look into other options to help you get out of debt.
