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Disadvantages of Paying Student Loans With Credit Cards

June 3, 2024

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BECOME A DEALER

Using a credit card to make your payments and stop putting any student loans in default may seem like a smart idea if you’re struggling to keep up with your payments. But it can be expensive to use a credit card for your payments.

Higher Debt-to-Income Ratio

You’re rising the amount of debt you have by moving your payments to credit cards. This will cause your ratio of debt-to-income (DTI) to increase. Your credit score can be adversely impacted by a higher DTI ratio and find it harder to apply for other forms of credit.

Also, Read: Ways to Protect Your Credit Card and Money

Charges for interest

Credit card interest rates are typically significantly higher than interest rates on student loans. For the 2020-21 academic year, federal student loans taken out have rates as low as 2.75%. The average interest rate on credit cards, on the other hand, is according to the Federal Reserve is 16.43 percent as of Aug. 2020.

Also Read : How to Maintain a Good Credit Score

Can You Pay Your Student Loans With a Credit Card?

Cash advances fees

To take out a cash advance that is separate from the interest charges, most credit cards charge you a fee. The cost, for instance, maybe 5% of the value of the loan or $10, whichever is greater. You will pay a $15 charge for a cash advance if your loan payment was $300.

Also Read: Understanding Cash Advance and Personal Loans

Fewer Protections

Usually, student loans have more repayment benefits than credit cards. You may be eligible for deferment, forbearance, or alternative repayment options if you can’t handle your payments or are facing financial hardship. Credit cards do not provide these benefits, ensuring that even if you lose your job or have a medical emergency, you are on the hook for payments.

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