Experts: Should You Make a Student Loan Payment Using a Credit Card?
As millions of student loan borrowers start factoring loan payments back into their budgets this October, some may wonder if it’s worth it to put a payment (or two) on a credit card.
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While this may sound like a convenient way to make a student loan payment, the financial professionals GOBankingRates spoke to all universally agreed this is a bad idea. Here’s why credit cards shouldn’t be used when making student loan payments.
Generally, It’s Not a Payment Option
Before we dig into some of the reasons it’s not a good idea to pay for student loans using a credit card, we need to address whether this is a payment option for private or federal student loans.
This type of payment is not possible for those with federal student loans, said Grant Gallagher, AVP, head of wellbeing at Affinity Federal Credit Union. Borrowers might need to look into other payment options like a cash advance and those are one of the most expensive ways to pay for anything.
If you have a private lender that allows you to use credit cards as a form of payment, keep in mind these usually include a service fee charge. Gallagher said this payment may also be charged as a cash advance and this comes with additional fees and/or a higher interest rate from your credit card issuer.
View: All of the States That Will Pay Off Your Student Loans
Negative Impact on Your Credit Score
Your credit score could be negatively impacted by using a credit card to make student loan payments, said Laura Sterling, VP of marketing at Georgia’s Own Credit Union.
“Any time you significantly reduce your credit utilization ratio, your FICO score goes down and credit utilization ratio makes up 30% of your credit score,” Sterling said.
It Will Cost You More Money
Let’s imagine, however unlikely this scenario is, you make a student loan payment using a credit card and are not charged a cash advance. If you do not pay this balance off in full and carry it from month to month, Gallagher said you’ll wind up paying interest on this balance.
“Since student loan payments are either partially or largely interest charges, you are now paying interest on that original student loan interest,” Gallagher said. “As credit cards generally carry a higher APR than student loans, this credit card interest charge could be significant.”
Sterling adds that many credit cards have a higher interest rate than the rates on your student loans. In the long run, this could cost the borrower even more money and force them further into debt.
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This article originally appeared on GOBankingRates.com: Experts: Should You Make a Student Loan Payment Using a Credit Card?
