Using credit card to pay home loan: What you need to know
Home loans are long term financial commitments that take over 30 years in most cases and therefore require a lot of planning. Therefore, you need to ensure that you select a proper loan type and have the proper repayment strategy. If the above methods do not work effectively one option that some homeowners consider is paying their monthly mortgages with a credit card. But it can let them build up rewards points and possibly have better credit. Nevertheless, there are certain disadvantages in the case of paying a home loan with the help of credit card. This article will help you weigh the advantages and disadvantages of such a decision and thus determine whether it is suitable for you.
The Potential Benefits
However, there are some benefits of applying a credit card to pay your mortgage. First, you can accumulate rewards points and miles which can be redeemed for cash back, credit on statement, gift cards, other benefits and free flights, free hotel accommodations and the likes. The actual bonuses that you can receive depend on the particular credit card that you sign up for. However, some of the highly preferred choices include cards with 1-5 percent cash back on all purchases or those that enable one to accumulate points that can be utilized to pay for travel.
For example, if you pay your monthly home loan bill using a rewards credit card, you stand to gain thousands of dollars in rewards over the duration of your loan. The only thing you should ensure is that you don’t get attracted to cards that come with an annual fee since this will only end up reducing any gains that you make.
Another is that if you manage your credit card properly and pay off the balance in full every month, your credit rating has the potential to increase. This is so since one of the factors that determine FICO score is the credit card utilization rate, which is the amount of credit that is currently being used. Maintaining this ratio low is one way of showing that one can handle debt in a proper manner.
Using your credit card to pay for your mortgage adds up to your credit utilization. However, if you pay the amount in full so that it does not roll over to the next month it will not harm your ratio. Also, having a large monthly payment such as a mortgage can be used to show you can manage large credit limits.
Downsides to Consider
It will also be important to understand that even if there are some benefits of paying a mortgage with a credit card, there are also disadvantages of doing so that must be taken into consideration.
One of them is cost which is one of the most important factors to consider when choosing a mode of transportation. Almost all credit cards have a convenience charge that is usually between 2% and 3% of payments such as mortgages. That means if your monthly mortgage check is $2,000, you will be charged an additional $40-$60 for using your credit card. Such charges can prove very costly when consolidated over a 30-year mortgage loan period. You’ll need to ensure that the rewards you earn are greater than the cost for such a strategy to be financially beneficial.
You also have to consider the organizational issues to address. Monitoring payments made through several credit cards for mortgages across different years and ensuring that you meet the set requirements by the mortgage lender can be challenging. Forgetting to make payments due to not remembering which card was used when can lead to poor credit.
Lastly, as for credit cards, its proper utilization strengthens the score, but if the person goes into a debt that he cannot easily repay, it weakens the score. Late payment or having a balance leads to credit harm. While high utilization ratios are dangerous to the lenders. That means you have to be 100 percent sure that you are capable and willing to pay your entire mortgage amount with the credit card each and every month without fail. If that is not the case then the associated risks would be more than the associated benefits.
Tips for Success
If you understand the risks and still want to pay your mortgage with a credit card, there are things you can do to improve the chances it will work out well:If you understand the risks and still want to pay your mortgage with a credit card, there are things you can do to improve the chances it will work out well:
Mortgage payment reminders – Since you do not want to default on your monthly mortgage payments, remember to set reminders to help you know when to make the payments. If possible, automate the alert and reminder processes.
Use one primary card – Choose a specific rewards credit card that you consistently use for every payment cycle. Don’t rotate cards. It causes confusion.
Make a record – The use of excel or any other means to record the payment made is important for purposes of documenting when every payment was made.
Be prepared for the unexpected – Ensure that you have an emergency fund that would enable you pay at least two months’ house mortgage in the event you are unable to use your card due to some unforeseen circumstances.
Plan for costs – Since the amount will be around two to three percent for the convenience fee, make sure that you include that amount in the monthly housing expense so it does not break your bank.
Monitor cards carefully – Always scrutinize card statements to check for problems while being wary of fraudulent charges.
Do not use actual credit card – It is unwise to use an actual credit card cash advance to pay the mortgage since the charges are extremely high.
It is crucial that you provide yourself some leeway – Only use your credit card to make mortgage payments if the credit limit on the card is more than the amount of the payment.
Practically – Do this on a monthly, bi-monthly, quarterly or yearly basis. If using a card no longer provides good economic value to you, go back to the older forms of payment.
The Bottom Line
Be cautious when paying your recurrent home loan bill through the use of a credit card. The rewards can definitely accumulate. But so can the risks and the organizational issues as well. It is imperative that you must make sure that you have understood all that is demanded of you. Always have systems, backup and self-check-in procedures in place. And especially be very consistent with paying on time and in full every month. If you believe that you cannot handle all that, it is better not to pay with a credit card for mortgage at all in order to prevent the credit rating from being damaged or the debt to increase. However, making proper arrangements, paying with plastic could be profitable in the long run.
