Can You Settle a Debt Using Your Credit Card?
Exploring the Possibility
Many individuals contemplate the prospect of settling a debt via a credit card for various reasons. Some aspire to accumulate rewards when making mortgage payments, while others seek relief from the interest attached to their auto loans by leveraging the advantageous 0% Annual Percentage Rate (APR) offered by certain credit cards.
Understanding the Challenge
Unfortunately, most loan types impose restrictions on using a credit card for direct payments. Although alternative methods exist, they tend to be inadvisable due to their associated drawbacks, including elevated interest rates, processing fees, and potential risks.
Unveiling Potential Solutions
Here are several potential approaches to consider when aiming to settle a debt using a credit card:
1. Balance Transfer to Your Credit Card
You might consider transferring your existing loan balance to a credit card. However, this approach is practical only if the credit card's interest rate is lower than that of your existing loan. Typically, credit cards tend to carry higher APRs compared to other loan options. As of May 2023, the average APR for all consumer credit cards with interest charges stood at 22.16%, according to data from the Federal Reserve. In contrast, auto loans during the same period had an average rate of 6.63% for new vehicles and 11.38% for used ones (per Experian). New federal student loans featured an average APR of 5.50%.
One exception might be a balance transfer to a credit card offering an introductory 0% APR period. Nevertheless, this approach comes with its own set of risks. The longest 0% introductory APR periods typically last between 18 to 21 months. To make this option viable, you would need to be approved for a credit limit on the card that surpasses your existing loan amount. Additionally, there is typically a fee to transfer the loan, usually ranging from 3% to 5% of the total balance. Failure to pay off the transferred balance before the 0% APR period expires will result in accruing interest on the remaining balance at the standard and notably higher APR.
2. Utilising a Third-Party Service
Certain third-party payment processors, such as Plastiq, enable the use of credit cards for payments to vendors that do not ordinarily accept cards. This option may be useful when facing temporary financial constraints or when seeking to capitalise on a sign-up bonus. However, it is essential to be mindful of the processing fee associated with this service. Failing to pay off your credit card balance on time will lead to interest charges at the card's standard rate.
3. Tapping into Your Card's Cash Advance Limit
A credit card cash advance involves securing a short-term loan against your card's credit line. While this method offers quick access to cash for loan repayment, it is one of the most expensive ways to settle a debt with a credit card. A cash advance typically incurs a fee from your card issuer, which can be either a flat rate or a percentage of the total advance amount. Unlike standard purchases, there is no grace period for cash advances, meaning interest begins accruing immediately upon receipt. Furthermore, the interest rate on cash advances is typically higher than that for regular purchases.
Due to the higher costs associated with cash advances compared to the interest on existing loans, this method is generally discouraged.
4. Exploring Your Card's 'Flexible Financing'
Certain credit cards offer "flexible financing" programs like My Chase Loan and Citi Flex Loan, allowing you to obtain a loan against your card's existing credit line. These loans typically come with a fixed interest rate and are repaid over a set period, typically ranging from six to 24 months. Similar to a cash advance, this method provides an immediate cash infusion to your bank account for settling your existing loan. However, for this approach to make sense, the APR offered by your card for this loan should be lower than that of the existing loan you wish to pay off.
The Final Verdict
In conclusion, while it is indeed possible to use a credit card to settle a debt, it typically comes at a cost. This cost typically arises in the form of transaction fees and higher interest rates. Transferring an existing loan to a credit card offering a 0% introductory APR on balance transfers might be a sensible choice for certain individuals, but it is advisable only if you are confident in your ability to pay off the balance in full before the promotional period concludes.