Can You Pay Off a Loan With a Credit Card?

Using a credit card to pay off an existing loan is a concept many people consider. While possible in certain situations, this approach involves specific methods and financial implications. Careful consideration of these factors is important before deciding if this strategy aligns with your financial goals.

Methods for Paying Loans with Credit Cards

Several methods exist for using a credit card to address an outstanding loan. These methods typically convert a loan balance into credit card debt.

A common approach is a balance transfer, moving debt from one credit account to a new credit card. This involves applying for a new card and transferring a balance from an existing loan or another credit card. Some issuers provide balance transfer or convenience checks, which can pay off other debts or obtain cash.

Another method is a cash advance, borrowing money directly against your credit card’s line of credit. You can obtain a cash advance at an ATM, a bank branch, or through convenience checks. The cash can then be used to pay off a loan.

A third-party payment service can also facilitate using a credit card for payments that do not accept cards directly. These services act as intermediaries, accepting your credit card payment and forwarding funds to your loan provider via check or electronic transfer.

Financial Factors to Consider

Evaluating financial implications is important when considering using a credit card for loan repayment. Interest rates and associated fees can significantly impact the overall cost.

Credit card interest rates are generally higher than those for most personal loans. The average credit card annual percentage rate (APR) can be around 21.95%, while cash advance APRs are often higher, ranging from 17.99% to 29.99%. Personal loan APRs typically average around 12.64%, with a range from 6% to 36% for qualified borrowers. Some balance transfer offers feature a promotional 0% introductory APR for a set period, but a higher variable rate applies once that period ends.

Various fees can also add to the expense. Balance transfer fees typically range from 3% to 5% of the transferred amount, often with a minimum of $5 or $10. Cash advances usually incur a fee of 3% to 5% of the advanced amount, or a minimum of $10, whichever is greater, and interest begins accruing immediately without a grace period. Third-party payment services may also charge a transaction fee, often around 2.85% to 3% of the payment amount. These fees can quickly diminish any potential savings from a lower introductory interest rate.

Using a large portion of your available credit can also impact your credit score. Credit utilization, the percentage of your total available credit that you are using, is a significant factor in credit scoring models, accounting for 30% of your FICO score. Lenders prefer a low utilization ratio, generally below 30%. A high utilization ratio, especially exceeding 50%, can negatively affect your credit score. Opening a new credit card account for a balance transfer may result in a hard credit inquiry, which can temporarily lower your score by a few points.

Applicability to Different Loan Types

The feasibility of paying off a loan with a credit card varies significantly depending on the loan type. Different loan structures and lender policies influence whether such a transaction is possible.

Paying off one credit card with another via a balance transfer is common. Personal loans can sometimes be paid using cash advances or convenience checks from a credit card. However, some lenders may have restrictions, such as not allowing a balance transfer to a credit card from a personal loan issued by the same bank.

Federal student loans generally cannot be paid directly with a credit card due to federal regulations. While some private student lenders might allow it, this is not widespread. Workarounds using third-party payment services exist for student loans, but these typically involve processing fees that can negate any benefits.

Direct payment of auto loans with a credit card is rare, though third-party services might offer an indirect method. Paying a mortgage directly with a credit card is almost universally not possible because mortgage lenders typically do not accept credit card payments due to large sums and transaction fees. Secured loans, such as mortgages and auto loans, are less frequently payable by credit card compared to unsecured loans like personal loans or credit card debt, primarily due to collateral and specific lender policies.