There are a few ways you can pay off a loan, and it’s a tough decision to pick the right one.
One way is using a credit card. In this article, we’ll answer the following:
- can you use a credit card to pay off your loan?
- how to pay a loan with a credit card
- how to choose the best credit card
- is it suitable for you?
- the risks
- interest-free periods
- other ways to pay it off
- support if you’re in debt
Can you pay off your loan with a credit card?
Credit cards are helpful, and one of their uses is to manage debt.
However, they come with risks. Taking out a loan to pay off high-interest credit card debt is more common, but sometimes, doing the opposite works.
To see if a credit card can manage your loan, ask yourself:
- does my card offer a good deal on money transfers?
- is the borrowing cost cheaper for the credit card than the loan?
- will this save me money?
- can I repay the loan during a credit card’s 0% interest period?
Paying off a loan with a credit card can be a good option if you're confident it's right for you or a professional has advised you.
How to pay off a loan with a credit card
First, pick a credit card with a deal on money transfers that a financial advisor recommends which’ll put you in a better financial position. One that doesn’t offer a deal on money transfers means you may pay more fees than necessary.
A credit card allowing for money transfers allows you to transfer the total amount to your current account.
Some lenders also allow customers to just use their credit card to make a card payment, therefore removing the need to do a money transfer.
Don’t get a cash withdrawal. This incurs charges. You must ask for a cash transfer.
A cash withdrawal is when you take money out of your account. A cash transfer is when you pay into someone’s account directly from yours.
Cash withdrawals come with additional charges so it's important to consider this when managing your money. To avoid charges, you can ask for a cash transfer.
Once you’ve requested the money transfer, you can use this money to pay off the loan gradually or in one lump sum. It depends on your loan, your lender and the T&Cs.
For example, some lenders charge an early repayment fee. Keep this in mind if you’re paying off in a lump sum.
How to pick the best credit card
To prevent getting into more debt, consider a card which:
- charges 0% on money transfers
- has a long-term, low-interest rate
- has an introductory rate a financial advisor recommends
- gives you the flexibility to pay back affordably
This stops you from paying more in interest than on your original loan.
Can everyone pay off a loan with a credit card?
Not everyone is accepted for a credit card. You’ll need a strong credit score to get a 0% credit card, good interest rates and the best introductory rates.
It's only worthwhile to do this if you have the above, and you should consider other options like Direct Debit payments if your credit score gets in the way.
What are the risks of taking out a credit card?
Credit cards always come with a level of risk. However, when used correctly, they're a great tool to help you get back on track.
Using your credit card for other things
A risk when using a credit card to pay off a loan is using it for other things. It would be best to use it only for the initial money transfer.
If you use it for purchases or withdrawals, you may get charged interest which can be high. Driving up interest can impact your capacity to pay back the loan. This can affect your credit score.
Not making minimum monthly payments
You can lose your 0% rate and get charged fees if you don’t meet your minimum monthly payment. Make sure you pay back the minimum amount every month.
We recommend setting up a Direct Debit or standing order to make a minimum monthly payment. This makes sure you'll remember to do it and takes away stress.
Not clearing your balance during the interest-free period
After this period, rates are likely to be much higher than the original loan, so it’ll be higher in the long run.
Money transfer fees
Even credit cards with 0% interest can charge a fee for money transfer. There’s also the risk for additional interest if you settle a fee early.
Not communicating
Always talk to your credit card provider or lender if you run into financial problems – they’re always open to help.
You need to consider all of these costs to understand the best option for you. Always try to get independent financial advice.
Contact charities if you need. Citizen’s Advice, for example, can help you manage your finances and point you in the right direction.
Read our guide on what to do if you’re in debt or need help.
What if the interest-free period runs out?
There are a few things you can do:
- apply for a new 0% credit card
- pay the interest if you can afford it
- use savings to pay off the rest of what you owe
- consider other funding options, which we discuss below
Are there other ways to pay off your loan?
Taking out a credit card to pay off a loan may make financial sense, but there are other ways you could pay off debt without taking out more credit.
You can get free independent help and advice from professionals who can discuss all the options available to you. Read our guide on what to do if you’re in debt.
Using your savings
If you can pay off your loan early by using savings, it could save you money in the long run as you'd reduce the amount of interest you owe over the term.
However, it’s not always the right option for everyone, so it’s worth asking an independent financial advisor for their view.
For example, if the interest rate of your debt is less than the amount of interest you earn on your savings, you can build up savings and pay the debt off later.
Switching to a different loan
You could apply for another loan with a shorter-term, lower interest rate. This can save you money in the long run, but make sure you can meet the larger monthly repayments.
Extra payments
You can repay your loan faster by making overpayments – extra payments each month.
This method can be helpful for people who can’t pay off their loan(s) in full but want to lessen their debt.
It's important to tell your lender you want to make overpayments as there may be additional charges which they can discuss with you.
This isn’t an option if you took out a loan before February 2011. People who took out a loan after February 2011 can repay up to £8,000 in extra payments over 12 months without being charged.
A debt consolidation loan
Merging all your debts into one lump sum and paying it off with a debt consolidation loan allows you to pay back debts over a longer period, usually at a lower interest rate.
These are only suitable for certain people and specific amounts of debt and may also come with fees.
What to do when you’re in debt
The important thing to remember when you’re in uncontrollable debt is that you’re not alone. You can find ways to manage the stress, find help and consolidate.
Speak to your lender, credit card provider and charities – they’re there to help you. Citizen’s Advice helps point you in the right direction.
Read our guide on what to do if you’re in debt or need help.
