Should You Use a Credit Card to Pay off Your Loan?

If you find hard to juggle with your debts, you can use your credit card to pay off them, but you need to ensure that you will really save money otherwise you will end up with changing the form of your debt.

Credit cards help you make a purchase when you are stripped of cash and you want to build your credit. When you make a purchase with your credit card, you have to settle your dues within the grace period. Make sure that you pay off the debt before the grace period expires otherwise interest will accrue on your account.

Can you pay off the debt with your credit card?

Yes, you can use credit cards to pay off your short-term debt. Your credit card company will allow you to transfer the card balance to your current account that you will use to pay off the whole of the debt.

The table below mentions what you should bear in mind while transferring the balance to your account:

  • You get a 0% balance transfer credit card.
  • The interest rate is relatively lower than your original debt.
  • Prepayment fees if you make repayments before the scheduled time.

Just because you can pay off your debt with credit cards, does not mean that you should opt for it. One of the significant drawbacks of using credit cards to pay off your debt is you will pay a balance transfer fee, which usually falls between 1% and 5%. The interest rates of credit cards are always higher than other short-term loans. You should use cards to pay your unsecured debts only when they set you back more than the former. However, a balance transfer is the best option when you pay your collective debt in instalments at a reduced rate of interest.

What if a balance transfer is no longer available to you?

If your credit card company does not allow you to avail the facility of a direct balance transfer, request for credit card convenience cheques. You will write these cheques to your lender or yourself to deposit the amount into your cheque account to make the payment to your lender. This is the best approach to avoid cash advances. However, convenience cheques also bring some drawbacks.

  • You will pay a 5% fee for every cheque you write.
  • The interest rates are subject to be higher than the purchase APR on your credit card.
  • You will not be eligible for 0% promotional APR offers, nor for the grace period. Interest will immediately accrue as you write a cheque or withdraw the cash.
  • Your credit utilisation rate will go up, leading to a lower credit score.

Are there any other ways to settle your debt?

You can pay off your debt with your credit card and it does make a sense as long as you get an affordable deal, but there are many other ways to help you settle your dues.

  • Use your savings

Dipping into savings to pay off a loan undoubtedly leaves a nasty taste in the mouth, however, if you think differently, you can save your money in interest, an additional expense. Talk to your lender if they allow you to pay your debt in advance. Confirm that you are not going to prepayment fees.

  • Take out a different loan

If you do not have enough savings to utilise it toward your debt settlement, you should take out a new loan at competitive interest rates. Compare market rates so that you choose the one that fits your budget. Make sure that you do not decline behind repayments. It is usually recommended that you should take out instalment loans. You will pay fixed monthly instalments at a reduced rate of interest, thus they are easier to manage.

  • Additional repayments

Ask your private or direct lender if they allow you to make additional repayments without charging any fees. This will help you avoid interest payments and you will get rid of debt early. Let your lender know about your financial condition so that they remain lenient. Lenders may also provide you with other affordable offers to settle the whole debt if you clearly express why you are not able to repay.

  • A debt consolidation loan

A debt consolidation loan is the best loan to merge all of your existing debts into a single large loan at a reduced interest rate. Though these loans come with the lower interest rates, they can also be expensive if you add up the total cost of your loan.

Now that you have got your answer whether you should use a credit card to pay off your debt or not. Settling debt is not as easy as it seems. Every option has some pros and cons. Evaluate each option and choose the one that does not cause further damage to your finances.