Pay Your Student Loans & Earn Credit Card Rewards

Pay Your Student Loans & Earn Credit Card Rewards

With an average student loan debt of R330 000 for those who graduated in 2014, student loan debt is often quite a significant commitment for young professionals. If you need to repay tens of thousands of dollars in the next few years, wouldn’t it be nice to earn credit card rewards along the way? Getting 1% back would help put some money back in your pocket.

But not all student loan servicers accept credit card payments. There are also good reasons for not shifting your student loan balance to a credit card. Let’s take a look at whether you can earn credit card rewards from paying your student loans and whether you should try to do it.

Paying Other Student Loans by Credit Card

If another company is your student loan servicer – and if it accepts credit card payments for a low fee or no fee (or is willing to waive the fee) – you might be able to earn significant cash back by making a student loan payment on your credit card if you’re someone who always pays your credit card bill in full.

You will first need to apply and get approved for a sign on bonus and cash rewards. Look for something like R5000 cash back after you spend R50 000 within your first three months of card membership, plus 1% back on all purchases. These cards are usually given to people with great credit records.

You can use this card to make large, once-off payments on your student loan. Set aside the cash to pay off your pending credit card charge, so you don’t end up trading low-interest debt for high-interest debt.

Also, let your credit card issuer know ahead of time that you’re going to be making a large transaction so it won’t be declined or flagged as fraudulent.

After you’ve paid, keep an eye on your credit card statement to make sure that the transaction is posted as a purchase. This might just earn you the rewards, and a 1% back. You’ll then want to pay your credit card bill in full and on time to avoid incurring interest or late fees.

This strategy will allow you to accomplish three things in one: taking a chunk out of your student loan principal balance, saving all the interest you would have paid on that principal over the years, and earning significant credit card rewards.

Hopefully you can get a student loan servicer that accepts credit card payments. However, if you are someone who has a credit card balance and already struggling to pay it, rather don’t go for this option. Student loan interest rates are generally lower than credit card interest rates, so if you’re having trouble making your student loan payments on time, it may be cheaper to incur a late payment fee to the student loan company than to accrue interest on a credit card.

What About Your Credit Score?

Paying off a large chunk of your student loan with a new credit card can actually help your credit score in several ways. Applying for a new credit card, in and of itself, will temporarily ding your credit score. However, the increase in your total available credit from the new card’s credit line can help your score. Paying down the balance on your student loan can also boost your credit score.

These are general guidelines about how the credit bureaus say different actions affect borrowers’ credit scores. FICO cautions that different actions will affect different consumers’ scores in different ways, depending on the total picture of their credit profile.

To Summarize

Many student loan servicers won’t let you pay your student loan with a credit card – or will charge a fee for doing so or limit how much you can charge. These rules are in place to save lenders money on credit card processing fees and to keep consumers from turning relatively low-interest student loan debt into higher-interest credit card debt.

But if you have excellent credit-card habits, a chunk of extra cash to pay down your student loan, a great rewards credit card and a student-loan lender that will accept credit card payments without tacking on a fee, you can come out ahead by making student loan payments with your credit card.

Categories: Student loans

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