The Pros and Cons of Paying Back Student Loans With a Credit Card

Written by: Kristyn Pilgrim
Updated: 4/02/20

Paying money toward student loans each month can be a drag, and there can be some benefits to using credit cards to make these payments. Credit card companies often offer bonuses and rewards, such as cash back or low starting interest rates, which can save you money and also put cash back into your pocket.

You can’t always use a credit card to make student loan payments directly, however, and there can often be added fees when you can. Credit card interest rates are usually higher than student loan interest rates. Using a credit card for student loan payments can lower your credit score, as well. 

You need to look closely at all the credit card and student loan payment terms and conditions to see if using a credit card for your loan payments will help or hurt you overall.

Paying Student Loans With a Credit Card

The average interest rate for student loans is around 6%, while the average interest rate for credit cards is around 14% to 15%. This would seem to make using credit cards to pay off student loans a bad idea. Higher interest rates will mean paying more money over time if you carry a balance and aren’t able to pay the whole thing off every month. 

Credit card companies often offer sign-up bonuses, lower starting interest rates, and cash back rewards, however. These can make it worth it to use a credit card to pay back your student loans if you know what you are doing, do your research, and pay attention to fees and all the associated terms and conditions.

Not all student loan lenders or servicers will allow you to use a credit card to make student loan payments directly, either. Most federal student loan servicers require you to make payments straight from your bank account, for example, unless you have fallen behind and need to adjust your repayment plan.

Check with your loan servicer to find out if using a credit card is even something you can consider.

Credit Cards Can Offer Rewards and Better Terms

While credit card interest rates are generally higher than student loan interest rates, there are often cards that offer bonuses and rewards for using them – often for the first 12 months. Credit card rewards can include cash back for purchases, which can help you to put money back into your pocket. 

Student credit cards can start out with 0% APR on purchases for the first six months and matching cash back for all purchases in your first year. If you use one of these cards to pay your loan payments, you can end up making money on the deal. 

The biggest trick to this is to make sure that you can pay your entire credit card bill every month. This way, you can avoid paying interest at all. 

To avoid paying higher interest rates, you will need to keep paying off your credit card balance each month.

Using a Credit Card Can Hurt Your Credit Score

Credit cards can help you to build credit if you can keep your credit card debt to a minimum and manage to make your monthly payments on time. They can also hurt your credit score if you miss payments or let your debt get too high.

Student loans are based on installment credit, while credit cards use revolving credit. Installment credit involves a fixed borrowed amount that you have a set amount of time to pay back based on set monthly payments. Revolving credit usually involves a line of credit, and you can borrow up to a credit limit. The amount of money you borrow each month will then determine your monthly payment. 

Credit cards, and revolving credit, can make it easy to fall into a cycle of debt that can negatively impact your credit score. Revolving credit and the amount of debt you carry can drop your credit score. 

How to Decide When to Use a Credit Card to Pay Back Student Loans

There are many things to consider when looking to pay back your student loans, including deciding whether or not to use a credit card to do so. Some of the following questions can help you make a decision:

  • Can you get a better interest rate with a credit card than you have on your student loan? If you have a private student loan, a student credit card can actually have a better interest rate in some cases.
  • How large is your student loan debt? If you have a small amount of debt, transferring it to a balance transfer card or making bigger payments on credit cards can help to shrink the loan faster. This means less interest over time.
  • Are there any “swipe fees” or extra fees involved with using the card to pay on your loan? Not all lenders or loan servicers allow credit card payments directly, and some require you to use a third-party company to do so, which involves a fee. Merchants generally cover swipe fees for using a credit card, while loan servicers often don’t. This can mean additional fees that are usually between 1% and 5%.
  • Can you make your payments in full each month? The best way to use a credit card to build, rather than hurt, your credit is to pay off the full amount each month. If you can do this and the credit card has some cash back rewards for using it, it can be a good method for paying back your student loans and gaining some incentives in the process.