Can You Pay Off a Loan With a Credit Card?

Read on to learn more.

Updated: December 29, 2023
Rachel Wait

Written By

Rachel Wait

 

If you’re paying off an expensive loan and are looking for a cheaper way to clear that debt, there is one type of credit card that could help you. Known as a money transfer credit card, this form of plastic could help you to repay your loan at a lower rate of interest and pay it off faster. 

In this article, we look at how this process works, what to watch out for and the alternative options. 

Can I pay off a loan with a credit card?

Yes, it’s possible to use a money transfer credit card to pay off a personal loan.

A money transfer credit card lets you move money from your credit card (usually up to 90% to 95% of your credit limit) into your bank account. You can then use these funds to pay off the loan.

Once your loan has been settled, you’ll need to start making monthly repayments to your new credit card provider. If you’ve chosen a money transfer card with a 0% offer, these repayments will be interest-free for a set time. But it’s important to ensure you’ve paid off the balance in full before the 0% offer ends and interest kicks in. 

What to watch out for when using a money transfer credit card

Using a money transfer credit card has a number of benefits, but there are a few things to watch out for, as explained below:

The money transfer fee

Most money transfer credit cards charge a transfer fee. This is typically around 4% to 5% of the amount you transfer and will be added to your balance. So if you transferred £5,000 and paid a 4% fee, that would work out to be £200. Make sure you’ve factored this into your overall costs. 

The credit limit must be high enough to cover your loan

You’ll also need to consider whether you can get a large enough credit limit to pay off your loan amount. Get an early settlement figure from your loan provider so that you know exactly how much you need to repay and whether there are any early repayment charges for clearing it early. You’ll then need to check whether the credit limit on your credit card is high enough to cover this.

The best 0% deals require a good credit rating

When comparing money transfer credit cards, you ideally want one with an interest-free promotional period. However, to get accepted for the very best deals, you’ll need a good credit score. If your credit score isn’t up to scratch, you might be offered a shorter 0% deal or even turned away.

Be aware of when the 0% promotional rate ends

You’ll also need to have a plan in place to ensure you’ve paid off your balance in full before the 0% deal ends and interest is charged. For example, if you were repaying a balance of £4,000 and your interest-free period was 12 months, you’d need to pay off £333 a month to have cleared it in time. 

If it’s not possible to clear your credit card debt before the 0% deal ends, the interest rate you pay on your credit card after this point could be a lot higher than you were paying on your original loan. In which case, a money transfer credit card might not be the best solution.

Don’t use your money transfer card for purchases or cash withdrawals 

Avoid using your new credit card for other transactions such as purchases and cash withdrawals. The 0% offer might not apply to purchases and even if it does, racking up new debt on the card you’re trying to clear isn't wise.

What’s more, cash withdrawals incur a fee of around 3% of the amount withdrawn and you’ll be charged interest from the date of the transaction (even if you pay off your balance in full that month), making it expensive.

How to pay off a loan with a money transfer card

To pay off a loan with a money transfer card, follow the steps below:

  1. Ask for an early settlement amount from your loan provider so that you know exactly how much you need to repay and whether there are any early repayment charges.
  2. If you’re confident you will save money by using a money transfer credit card, start comparing money transfer credit cards to find one with a lengthy 0% deal and one that will offer a high enough credit limit. 
  3. It can be worth using an eligibility checker before you apply in full as this will tell you how likely you are to get accepted for a particular credit card without hurting your credit score.
  4. Once you’ve applied in full and received your credit card, you can transfer the required funds from your card into your bank account. Note that you usually have a set time to make your money transfer — this could be within the first 60 or 90 days of getting your card, so make sure you check. 
  5. Pay off your loan using the funds you’ve transferred and confirm with your loan provider that the balance has been settled in full.
  6. Start making monthly repayments to your credit card provider and make sure you’ve repaid the balance in full before interest kicks in.

Pros and cons of paying off a loan with a credit card

Pros

✔️ A 0% money transfer credit card can help you pay off a loan more cheaply.

✔️ You might also be able to pay off your debt faster.

✔️ You might be able to pay off multiple debts with the one card, making your payments easier to manage.

Cons

❌️ Money transfer cards usually come with a transfer fee of around 4% to 5%.

❌️ If you don’t pay off the balance before the 0% deal ends, you’ll start paying a higher rate of interest.

❌️ The credit limit might not cover the cost of your loan.

What are the alternatives? 

If you’re not sure whether using a credit card to pay off your loan is right for you, there are a number of alternatives to consider. 

Use your savings

If you have enough savings, it could be worth using some of these funds to pay off your loan early. You’ll need to check whether the rate of interest on your loan is higher than the amount you’re earning on your savings (which it probably will be) to be sure this makes the most financial sense. It’s also important to ensure you still have some form of savings cushion to fall back on in an emergency.

Switch to a different loan 

If your credit score has increased since you originally took out the loan, you might now qualify for a cheaper loan rate. If that’s the case, it could be worth switching to the cheaper loan if your lender permits it.

As with credit cards, many loan providers offer eligibility checkers so you can see how likely you are to get accepted for a particular loan without hurting your credit score. If you get the green light, you can then apply in full.

Consider a debt consolidation loan

Debt consolidation loans are designed to help you combine multiple debts, including loans and credit cards, into one monthly repayment with one lender. This can make your repayments easier to manage.

Plus, if your debt consolidation loan has a lower rate of interest, it can also work out cheaper and help you to pay off your debts faster. However, you need to be sure your debt consolidation loan will cover all of your debt and watch out for fees.

Make overpayments

If you can afford to, making overpayments on your loan will help you to pay it back faster and reduce the amount of interest you pay overall.

However, you’ll need to speak with your lender first to make sure this is permitted and find out whether you’ll be charged fees for doing so. Under the Consumer Credit Directive, if you took out a loan after February 2011, you can usually make full or partial loan payments of up to £8,000 without facing a penalty. 

Where can you go for debt help?

If you’re finding it hard to keep up with your loan repayments, you should speak to your lender as soon as possible. They should be able to put a plan in place to help you repay your loan.

They might be able to offer a payment holiday, for example, or increase the term of your loan to make loan repayments more manageable. Whatever you do, don’t ignore the problem and hope it will go away by itself.

If you’re struggling with debt and have concerns about how you’re going to manage to repay it, there are a number of organisations that offer free debt advice and can help you find the right solution.

These include Citizens Advice, StepChange and National Debtline. The advisers are non-judgemental and expert in helping people get out of debt. They can help you find the best course of action and you won’t need to pay for this advice.

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