Can You Pay Off a Personal Loan With a Credit Card?

Paying off debt should be a top priority for most people After all, the less debt you owe, the more money you have available to save and invest for the future But when you have multiple debts like personal loans and credit cards, it can be confusing to know the best strategy for paying them down. Specifically, a common question is Can you pay off a personal loan with a credit card?

The short answer is yes technically you can pay a personal loan with a credit card. But there are a lot of risks, fees and drawbacks that you need to consider before taking this approach. In most cases, you are better off avoiding credit card debt and sticking to paying your personal loan from your bank account via check, debit, or automated payments.

In this article, I’ll break down the pros and cons of using a credit card to pay a personal loan, look at some examples, and offer tips on the smarter ways to pay off a personal loan.

The Potential Upsides of Paying a Personal Loan With a Credit Card

At first glance, using a credit card to knock out a personal loan may seem appealing for a few reasons:

• Earning rewards or cash back: Many credit cards offer generous rewards on all purchases. So you could potentially earn 1-5% back in cash or travel rewards by charging your loan payment.

• Introductory 0% APR: If you transfer the loan balance to a card with a 0% intro APR, you could save on interest for 12-18 months.

• Access to credit: If you are short on cash one month, charging the payment could give you some temporary relief.

• Building credit: Making on-time payments may help build your credit score over time.

For some borrowers in a pinch, these benefits may appear to outweigh the downsides. But most of the time, the risks and costs outweigh any potential rewards.

The Downsides of Using a Credit Card for a Personal Loan

Here are some of the biggest problems to watch out for with this strategy:

• High interest rates: The average credit card interest rate is around 15-25%, much higher than most personal loans. This interest starts accruing immediately on credit card balances.

• Cash advance fees: If you withdraw cash from your credit card to pay the loan, you’ll incur costly cash advance fees. These are typically 5% of the amount advanced or $10-15, whichever is greater.

• Balance transfer fees: Transferring the balance to a new credit card often incurs a 3-5% balance transfer fee. So you’d start off the balance transfer indebted for the fee amount.

• Risk of missed payments: If you charge payments you can’t afford just to rack up rewards, you risk missing payments and getting hit with late fees of around $30-40 each time. Missed payments also negatively impact your credit.

• Credit utilization: A high balance on your credit card may increase your credit utilization ratio, which can lower your credit scores.

As you can see, the risks and fees can quickly negate any rewards you might earn, while hurting your credit and costing you more in interest.

Examples of When This Approach Does (and Doesn’t) Make Sense

To illustrate when it may or may not make sense to pay a personal loan with a credit card, let’s look at two examples:

When It Makes Sense

Let’s say you have a $5,000 personal loan charging 10% APR and have a credit card charging 15% APR with no balance on it currently. However, the credit card is offering a promotional 0% APR on balance transfers for the first 12 months with a 3% balance transfer fee.

In this case, it may make sense to transfer the $5,000 balance, paying a $150 fee. For the next 12 months, you could pay down the debt without accruing any interest charges, saving you around $417 compared to keeping it in the personal loan. Just be certain you can pay off the entire $5,150 within the promotional period.

When It Does Not Make Sense

Now let’s say you also have $5,000 left on your personal loan, but your credit card charges 25% APR and has a $2,000 balance on it already. Transferring the loan would push your credit utilization on the card up to 90%. Plus you may risk missing payments and accruing interest charges at 25%.

In this case, it is smarter to just keep paying the 10% APR personal loan from your bank account. The higher credit card interest rate and risk of missed payments make it too costly.

As you can see, the 0% intro APR card can provide interest savings in some cases, but otherwise, credit cards are ill-suited for personal loan payoffs.

Tips for Paying Off a Personal Loan the Right Way

Instead of resorting to credit cards, here are some smarter tips for paying off a personal loan:

• Make payments directly from your checking account via check, debit, or auto-pay. This avoids all credit card fees and interest.

• Pay more than the minimum when possible to pay it off faster. Even $20-50 extra per month makes a difference.

• Look into balance transfer cards only if you can pay off the entire balance within the intro 0% APR period.

• Avoid excessive spending and use any extra income to make extra principal payments.

• See if you can negotiate a lower interest rate with the lender. Some may drop rates for on-time payers.

• Consider debt consolidation or personal loans with lower rates to reduce interest costs.

• Stick to a budget that allocates as much money as feasible each month to debt repayment.

The bottom line is that personal loans and credit cards make a risky combination. It’s smarter to keep them separate and avoid credit card interest by paying personal loans directly from your bank account. But occasional exceptions can make sense if you get a promotional 0% APR and can pay off the balance in full during the intro period.