Are you repaying student loans and also own (or applying for) a credit card? You might have the notion of using credit card rewards to help pay off your student loan debt. While this is a potential payment strategy, is it a good idea or bad idea? To answer the question, it is vital to understand how credit card rewards programs function.
Credit Card Rewards: What They Are and How They Work
Perhaps you have received pieces of mail for credit card advertisements. The offers might be for 30,000 frequent flier miles, two free hotel nights, or a cash back bonus. Many credit cards payout rewards in two different formats.
Many credit cards offer an introductory bonus to attract new customers. All the credit card advertisements you see normally advertise the bonus offer because they emit the euphoric feeling of receiving free money. Of course, new customers need to meet a spending minimum ranging from $150 to $4,000, depending on the credit card, to receive the bonus.
Hotel credit cards offer bonus loyalty points or free nights, cash back credit cards offer statement credits, etc. Depending on how often you plan to use your new credit card, the sign-up bonus might easily be higher than the purchase rewards you will normally earn after an entire year’s worth of spending!
Regarding student loans, the best bonus will be cash back offers. This is because it is virtually impossible to convert airline miles or hotel points into a student loan payment. Not every cash back credit card offers a bonus, but, most of them do. The offers can range from a $25 bonus after making your first purchase to earning $150 after spending $500. Regarding the latter offer, $150 is a 30% reward rate! A remarkable one-time reward rate when the normal cash back reward card only pays 1% or 1.5% cash back on most purchases.
Introductory bonuses might be the tiebreaker when deciding between two very similar credit cards. If both credit cards offer the same everyday rewards, the bonus is often the leading reason why people choose one credit card over another.
While an introductory bonus might be a leading reason why you applied for a particular credit card, the everyday purchase rewards are also very important. Sometimes the bonus might be the equivalent of lipstick on a pig. After the bonus has been earned, the credit cards you earn on every purchase might not be a good deal or worth the annual fee, if the credit card charges one.
Before applying for a credit card, it is very important to look at the purchase reward payout. Some things to consider include is if your spending habits maximize your spending habits or if it is the best cash back rate.
Credit cards offer cash back in different manners. Some offer a flat-rate of 1.5% on all purchases, others might offer tiered payouts of 1% on all purchases but a higher rate on select categories like gas or groceries. You will need to do the math to see what reward program will offer the largest reward amount for your typical expenses. Regardless of which card you choose, you should only consider no annual fee credit cards and always pay the balance in full each month avoid interest fees.
Repaying Student Loans With Credit Cards
The average 2016 college graduate holds approximately $37,000 in student loans. And, the majority of borrowers are paying interest rates around 6.8 percent! That is a lot of money to pay back and any way to save money in the process is vital. This might be a large reason that people consider using a credit card to help repay their loans. Using a 1.5% cash back credit card to repay the $37,000 principal, without calculating interest, results in $555 in credit card rewards. That can be the equivalent of one payment.
The only problem is that most student loan companies will not accept credit cards as a payment method. If they do, they normally charge a 2-3% transaction fee, making the fee more expensive than the rewards earned from the transaction. This is because credit card companies charge merchants, the student loan company in this instance, an interchange fee of a similar percentage. So the lender will pass on the credit card fee to the customer to reduce overhead expenses.
Because of the transaction fees, it will be better to make the monthly payment from a linked checking or savings account because lenders do not charge any additional fees. Just as it is recommended to avoid annual fee credit cards, paying student loans with a credit card will only increase the overall cost most of the time.
Can Rewards Be Used For Student Loans?
When it comes to repaying student loans with credit cards rewards, the most viable option will be cash rewards as very few credit cards can be used to pay bills with rewards. Most programs are designed to have rewards redeemed for plane tickets, hotel stays, gift cards, or cash rewards. Depending on the reward program, the cash reward will be deposited into your bank account or show as a statement credit. While cash back credit cards offer the highest cash back rewards rates, other rewards programs allow users to redeem points for cash rewards, although, at redemption rates of 1% or lower.
For nearly every credit card, you will have to redeem your rewards in the form of a statement credit that will reduce the amount you owe on your next credit card statement. You will need to make a mental note to set aside the money saved to put toward the student loan payment instead of spending it on something else.
There are some exceptions to this rule. The Upromise MasterCard can allow you to directly apply reward towards Sallie Mae & Navient student loans. Credit cards that earn Citi ThankYou points can be redeemed to pay student loans and other bills. Otherwise, you will need to indirectly funnel the cash rewards towards the monthly student loan payment.
Is paying student loan debt with credit card rewards a good idea or bad idea?
For most people, using credit card rewards to make student loan payments will not be worth the hassle. Unless the rewards can be directly applied to the balance, it is really easy to use the rewards on something else. Especially if the monthly reward rate will only be a few dollars.
But, by setting aside the money earned from an introductory offer and the monthly reward earnings, it is possible to use credit card rewards to help pay off your student loan debt.