by Daniela Baker
In recent years, credit card companies have launched marketed campaigns to their customers encouraging them to use their credit cards to pay their major bills, including their mortgage. The credit card companies make this practice appealing by reminding their cardholder of all of the extra rewards points and cash back they will be accruing.
At first glance, it seems like paying your mortgage with your credit card is a good idea. After all, it’s a bill that you would be paying anyway. Why not get rewarded at the same time? Of course, it is always good to take a step back and examine why a bank would be encouraging you to earn more rewards (which will increase their expenses) and evaluate any negative factors that could affect you.
Why Credit Card Companies Encourage Credit Card Mortgage Payments
Several regulations have been introduced in recent years that have started to decrease the income that banks are able to make through overdraft and credit card fees. As a result, they are looking for new ways to earn money. One of these ways is to encourage increased usage of credit cards. This is because financial institutions earn what is known as interchange income for each time their customers spend with their credit cards. By encouraging customers to pay their bills with their credit card, the banks are guaranteed to increase their interchange income.
4 Reasons Why You Should Avoid This Practice
Here are four items you will want to keep in mind when determining whether to pay your mortgage with your credit card.
- Cost of interest – If you do not pay your balance in full at the end of each month, you will end up paying the interest charges from your mortgage company and then paying the interest from your credit card company. This can result in a huge increase in interest, especially when you consider that the rates on credit cards can run you 13%, 17%, 23% or more.
- More likely to default on payment – Charging your mortgage to a credit card can give you a false sense of increased cash flow. This is because you will see the additional money in your bank account that typically would have already been routed to your mortgage company. For many, this can cause them to unwittingly purchase more throughout the month. Then, when it comes time to pay their credit card, they don’t have enough money reserved. This can cause them to miss a credit card payment. This not only results in fee and interest, but it can also cause their interest rate to skyrocket. And once you are stuck with that higher interest rate, it is nearly impossible to get it decreased to your original rate.
- Harm to your credit score – Charging your mortgage payment to your credit card is going to cause your debt-to-limit ratio to increase. This ratio is one of the prime factors that is used when determining your credit score. Experts recommend keeping your credit card balance below 30% of the limit. This even applies to consumers who pay their credit cards in full each month. This is because data isn’t necessarily sent to the credit bureaus directly after you have made your payment.
- May cause you to get charged fees – There are several fees you may be charged by your credit card when you pay your mortgage with plastic.
One such fee is the over-the-limit charge, which happens when you exceed your credit limit. Paying your mortgage with your card may lead to this charge because you are more likely to accidentally go over your limit.
Another charge you may see is cash advance fees. Typically, when people use their credit card to pay for their mortgage, it is charged as a cash advance instead of a typical purchase. Most credit cards charge a fee for cash advances, and cash advance rates may also be higher than the purchase interest rate.
As a personal finance blogger, Daniela Baker helps consumers learn to earn more and save more with credit card deals at CreditDonkey.