Can You Pay a Bank Loan With a Credit Card?

Paying a bank loan directly with a credit card is a common query. While directly swiping a credit card at a bank to cover a loan payment is not an option, indirect methods exist that allow a credit card’s credit line to be used for this purpose. These approaches come with distinct financial and credit implications that require careful consideration.

Direct and Indirect Payment Approaches

Banks and other lending institutions do not accept credit card payments directly for loan installments. Loan agreements specify payment methods such as direct debit from a bank account, checks, or electronic transfers, which do not include credit card transactions. Federal student loan issuers, for instance, are restricted from accepting credit card payments by the Department of Treasury. However, individuals can use their credit card’s credit line to obtain funds through alternative means for loan payments.

One common indirect method is a cash advance, where you withdraw cash against your credit card’s credit limit. This can be done at an ATM or bank. Another indirect approach involves using credit card convenience checks, also known as access checks or purchase checks. These blank checks draw directly from your credit card’s available credit line and can be written out to pay bills, including loan payments.

Associated Financial Charges

Utilizing a credit card for loan payments through indirect methods incurs financial charges that increase the overall cost. Cash advances, including those facilitated by convenience checks, come with a transaction fee. This fee is a percentage of the amount withdrawn, ranging from 3% to 5%, or a flat fee, $10, whichever is greater. For example, a $1,000 cash advance with a 5% fee would incur a $50 charge.

Beyond the initial fee, cash advances and convenience checks are subject to a higher Annual Percentage Rate (APR) than standard credit card purchases. Cash advance APRs range from 24.80% to 29.99%, higher than purchase APRs. Interest on cash advances begins accruing immediately from the transaction date, without the grace period offered for credit card purchases. This means that even if the balance is paid off quickly, interest will still have accrued for the period the money was outstanding.

Impact on Your Credit Profile

Using a credit card to obtain funds for a loan payment can influence your credit profile. When you take a cash advance or use a convenience check, the outstanding balance on your credit card increases. This raises your credit utilization ratio, which is the amount of credit you are using compared to your total available credit. A higher credit utilization ratio can negatively impact your credit score, as it suggests a greater reliance on borrowed funds.

The addition of this new credit card debt also contributes to your overall debt burden. While it may help cover a loan payment in the short term, it shifts the debt from one form to another, potentially at a higher cost. Maintaining timely payments on the newly increased credit card balance is important. Any missed or late payments on the credit card will be reported to credit bureaus and can result in negative marks on your credit report, further affecting your credit score.