Interest rates on credit cards are notoriously high. Getting out from under credit card debt is often a major financial obstacle.

However, getting a credit card is still essential for most college students.

Credit Card Benefits for College Students

Many credit cards include perks for users like purchase protection, miles, points, or some other reward. These benefits can be valuable, but they are not the reason that college students need to get a credit card.

The biggest benefit for college students is establishing a line of credit that will age with the student.

Credit age is a significant factor in determining credit scores. For many college students, a student loan is the oldest item on their credit report. When student loans are paid off, the removal of the oldest item from the credit report can cause credit scores to drop.

That last point is worth repeating: paying off your student loans can cause your credit score to drop.

Sherpa Tip: The damage to credit scores from eliminating a student loan is typically small and short-lived. It shouldn’t prevent people from paying off their loans.

The best way to mitigate this issue is to have a credit card. A credit card account can stay open indefinitely without costing the user any money.

An aged credit card account may make things easier when the time comes to buy a house.

Using a Credit Card Responsibly in College

Having a credit card account and using it responsibly are two very different things.

For most college students the best bet is to do the following:

• Get a card without an annual fee. The purpose of the first credit card account is to build your credit profile. You don’t want to have to pay a yearly fee for the next 30 years.
• Pay off the balance in full each month. If you pay the full statement balance each month, you won’t get charged any interest.

Going this route is more than just a great way to build your credit score. It helps people track their monthly spending and get into good financial habits.

Credit Cards and Irresponsible College Students

Not all students are great with money. Some will max out their first credit card, miss payments, run up a ton of interest, and damage their credit report.

I’d argue that it is ok when something like this happens.

The consequences of poor credit card decisions can be devastating, but they are minor compared to the dangers of student loan debt.

Credit card limits for most college students are relatively low. If things get really bad, bankruptcy is usually available for credit card debt. With student loans, borrowers can easily rack up six figures of debt. Bankruptcy rarely works out for student loan borrowers.

Simply put, credit card mistakes can cause months or years of regret while student loan mistakes can result in a lifetime of regret and struggle.

If you are someone who has to learn things the hard way, it is much better to make your mistakes with a credit card.

Credit Cards vs. Student Loans

Many people are justifiably fearful of credit cards, credit card companies, and credit card debt.

This same concern rarely gets applied to student loans.

However, when it comes to personal finance, student loans are the deep end of the pool. Whether you sink or swim with your money management, it is better to find out first with credit cards.

The rewards for credit card success in college are valuable, and the dangers from mistakes are dwarfed by student loans.

The post Credit Cards and College: An Easy Decision appeared first on The Student Loan Sherpa.

Most consumers will benefit from knocking out their credit card debt first. This debt is worse because the interest rates are normally higher and because there are fewer resources available to help with repayment.

On the student loan side of things, tools are available to get the debt under control whether you are struggling or thriving.

Student Loan Debt And Credit Card Debt Are Both Bad

Before jumping into the explanation of why credit card debt is worse, it is worth noting that both forms of debt are harmful.

Some people have the notion that student loan debt is “good debt.” The elimination of consumer protections and the increase in tuition costs put an end to the “good debt” fairy tale.

If you have student loan debt and credit card debt, eliminating both debts is a priority. The only question is which debt gets eliminated first.

Why Credit Card Debt Is Usually Worse

Credit card debt is objectively worse because interest rates are usually substantially higher. In the world of student loans, a 10% interest rate is on the high end and considered lousy. For credit cards, a regular interest rate of 13% is considered good.

If you somehow had a student loan with a higher interest rate than your credit cards, the math changes. However, this circumstance is rare.

Credit cards also have less forgiving repayment options. Student loans typically have deferments and forbearances in the event of a hardship. Pausing payments is far from ideal, but a payment pause may help some borrowers. Additionally, federal student loans have options like income-driven repayment and student loan forgiveness. Credit cards don’t have these perks.

Important Exception: Student loans are worse than credit cards in bankruptcy. Credit cards are treated like most other debts, while student loans require special steps that make them more difficult to discharge. If bankruptcy is on the horizon for you, the student debt may be worse.

The Advantage of Paying Credit Card Debt First

Knocking out high-interest debt first can save a ton of money. Knocking out credit card debt first also provides a unique advantage.

Paying down credit card debt provides immediate help to your debt-to-income ratio or DTI. The DTI is how creditors compare your income to the debt you carry. If your income makes it a struggle to keep up with your debt, getting approved for credit is challenging. If you want to buy a house, the DTI is the driving factor for how big of a mortgage you can get. Your DTI is as important — or more important — than your credit score.

Most people don’t realize that DTI compares monthly debt to monthly income. As your monthly bills get lowered, your DTI improves.

With student loans, if you pay off half your balance, the minimum monthly payment stays the same. Knocking out student loan debt only helps your DTI when a loan is eliminated.

Minimum payments for credit cards are calculated based on your balance. As you pay down your credit card balance, the minimum payment drops. This means that your DTI improves every month you make progress.

If you want to buy a house soon, a slightly improved DTI may make a huge difference. Improving your DTI may also help if you’re going to refinance your existing debt.

When is Student Loan Debt Worse?

As noted earlier, a reasonable interest rate on a credit card is often considered an alarming interest rate on a student loan.

However, some credit cards come with introductory interest rates of 0%. The problem with these intro, or teaser, rates is that they don’t last long. A 0% interest rate becomes 22.99% fast. Most intro rates last for six to 18 months.

If it will take only three months to pay off your credit card, but you have a year at 0%, it means you can focus on student loans for the next nine months. The key is taking advantage of the low intro rate without getting hit with huge interest charges once the intro period is over.

Refinancing Credit Cards vs. Refinancing Student Loans

Debt refinancing provides an option to lower your interest rates, depending upon your credit score and DTI.

Student loans can be refinanced by working with a refinance lender. The refi pays off some or all of the borrower’s student loans and creates a new loan. For credit cards, consumers refinance by taking out a personal loan and using it to pay off existing credit card debt. In both circumstances, consumers find a lender willing to offer lower rates and save money in repayment.

Generally speaking, student loan refinancing offers lower interest rates than credit card refinancing. For example, lender SoFi currently offers a student loan refinance product and a personal loan to pay off credit cards. The personal loan comes with an interest rate of 5.99% to 18.85%, and borrowers have three to seven years to repay the debt. SoFi’s student loan refinance has rates of 2.25% to 6.94%, and borrowers have between five and 20 years to repay the loan.

Thus, refinancing is an option for both credit cards and student loans. However, the refinance option doesn’t shift the balance between which is worse because the student loan refinance options are better than credit card refinance options.

The post Which is Worse: Credit Card Debt or Student Loan Debt? appeared first on The Student Loan Sherpa.

My Review: The Laurel Road Card is a surprisingly decent option for student loan borrowers. Previous student loan focused credit cards were lousy, but this one could be helpful for some borrowers. However, traditional cashback cards are still the preferred option for many borrowers.

The highlight of the Laurel Road card is the 2% cashback that can be used with the majority of student loan lenders and servicers.

Laurel Road Student Loan Cashback Credit Card Basics

The Laurel Road card is a straightforward cashback credit card. Cardholders get 2% back on all purchases that can be redeemed towards student loans with most lenders. Those that wish to redeem their rewards as a statement credit only get 1% back.

The card has no annual fee or foreign transaction fees. The Laurel Road card is on the Mastercard network, and applicants will need good to excellent credit to get approved. As a World Mastercard, the card includes ID Theft Protection, Extended Warranty Coverage, and Purchase Assurance.

Borrowers who don’t pay their balance in full each month are charged an interest rate of 13.99% to 22.99% APR. Like most other rewards credit cards, this card should only be used by those who intend not to carry a balance.

Signup Bonus and Incentives

This newer card comes with a decent signup bonus for new customers.

Laurel Road is offering $500 towards any student loan for customers who spend $5,000 or more within the first 90 days. If you opt to receive a statement credit instead, the bonus drops to $250.

Laurel Road also offers a 0% introductory APR for balance transfers made within the first 60 days of having the card. Unfortunately, if you take advantage of the 0% balance transfer, regular purchases will be charged the full interest rate unless the entire balance, including the transfer, is paid in full each month. In other words, this card only makes sense as a balance transfer card OR a reward card. Doing both at the same time will result in interest charges on new purchases.

Who Benefits from the Laurel Road Student Loan Cashback Card?

In the world of cashback credit cards, 2% is on the higher end, but most consumers can qualify for a 2% card. For example, the Citi Double Cash offers 2% back and has no annual fee.

The Laurel Road card is ideal for someone who wants to pay down their student loans but finds themselves using credit card rewards for impulse purchases. For many consumers, a credit card reward is a bonus or “free money,” so it is often easy to justify spending reward funds on non-essentials. The reward structure of the Laurel Road card provides a huge incentive to use the money towards student debt.

Avoiding a Mistake

If you carry a balance on your credit card or don’t have student loans, the Laurel Road card is a lousy option.

A 2% cashback reward doesn’t offset interest charges of 13.99% or more. Only use this card if you plan on paying your balance in full each month.

Additionally, it is essential to make sure your student loan servicer is on the list of eligible companies from Laurel Road. This list includes major servicers like CommonBond, Discover, Earnest, MyFedLoan, Great Lakes, MOHELA, Navient, Nelnet, PenFed, and Sallie Mae. Laurel Road claims they work with 95% of servicers, but this is a detail you want to verify before applying for the card.

Final Thoughts: Laurel Road Student Loan Cashback Credit Card Review

The card is a new product from Laurel Road, but as a refinance lender, Laurel Road has a solid reputation.

It would be nice if the card offered more features geared specifically towards student loan borrowers, but 2% cashback is a great start. As a result, the Laurel Road card is a reasonable option for student loan borrowers looking to repay their student loans aggressively.

The post Laurel Road Student Loan Cashback Credit Card Review appeared first on The Student Loan Sherpa.

Strategic payment of tuition and fees using a credit card can make sense under the right circumstances. Students who have the necessary funds in savings and those receiving tuition payments form an employer may potentially benefit from using a credit card to pay for school. Students who are unsure of how they will pay off the debt should avoid credit cards.

In most cases, credit cards are a lousy alternative to student loans. When students are looking for a short-term loan, the credit card terms may yield some savings.

The Disclaimer: Don’t Thing of Credit Cards as a Student Loan Alternative

Paying for college using credit cards is typically a bad decision. If you just got denied on your student loan application and you are thinking about using a credit card to act as a student loan replacement, it is a bad idea. Instead, it might be time to revisit your original plan to pay for school.

The vast majority of students should have a strong preference for student loans over a credit card for paying tuition.

Student loans will almost always have better interest rates, repayment plans, and tax advantages.

However, in very limited circumstances, paying with a credit card is the savvy financial move. This article will examine those few instances where it makes sense to pay for school with a credit card.

Best Candidate – People Getting Reimbursed for Tuition

If your company is paying for school, using a credit card to pay tuition could make sense.

The most important detail for students going this route is to have a reliable employer. If the accounting department quickly and consistently issues checks for tuition expenses, a credit card can be used to cover the bill, and the balance can be paid in full before any interest is ever charged to the account. If reimbursements at work move slowly or there is a chance of the tuition benefit elimination, using a credit card is risky.

In this circumstance, credit cards offer two potential advantages over student loans. The first is on the way interest is charged. Student loans begin accruing interest from day one. Charges on a credit card don’t generate interest on the debt as long as the monthly statements are all paid in full. A second potential advantage to using a credit card is avoiding student loan origination fees. Some student loan lenders, including the federal government, charge a fee in addition to the interest on the loan. For example, borrowing a $3,000 student loan with a 4% origination fee means the borrower will have to pay back a $3,120 debt.

The downside to a credit card is that many schools pass credit card merchant fees onto the students. One study found that the average school charges a 2.62% convenience fee. Depending upon your school, fees for using a credit card could wipe away the benefit.

Paying for School Using a 0% APR Credit Card

A 0% APR credit card sounds great in theory. Pay for school, don’t get charged any interest… free student loan!

Unfortunately, the 20% or more interest rate the comes after the introductory APR is brutal. Opting for a 0% interest credit card without a plan to pay off the debt before the intro rate ends is a huge mistake. Standard credit card interest rates are playing with fire.

The one time the 0% APR credit card might tip the scales would be for people who get tuition reimbursement quarterly or every six months. If you know when you will be repaid and you can use a credit card with a low introductory rate as a short-term loan, it could be a great opportunity to save some money.

Racking Up Credit Card Rewards by Making Tuition Payments

Some students have money sitting in the bank set aside for tuition. Some parents have money in the bank set aside for tuition.

Using a credit card for the tuition and fees transaction might seem like a good opportunity to generate a ton of credit card rewards with very little effort.

Adding this extra step towards paying for classes does offer a huge potential benefit, but it can also come with major costs. The same study that found that schools charge an average of 2.62% for credit card convenience fees also found that over 90% of schools charge some form of credit card fee.

If your school happens to be an exception to the fee rule, it is a great opportunity to get points and rewards. However, in most cases, the value of the rewards won’t exceed the fee charged by the school.

The analysis is fairly straightforward. Credit card companies charge merchants a fee to accept the credit card. Credit card companies offer consumers rewards to encourage them to use credit cards. At the grocery store, customers come out ahead because food costs the same whether you pay cash or credit. Most colleges are not willing to pay merchant fees, so they pass the cost on to students. Credit card companies can’t be spending more money on rewards than what they get from merchants, so the merchant fee should almost always be more than the value of the rewards.

People who follow credit card rewards closely may find executions, such as using the credit cards to meet a minimum spend requirement to get a new customer bonus, but the exceptions are limited.

In the majority of cases, if the school charges a credit card fee, the fee will be greater than the value of the rewards.

Credit Cards and Tuition Payments

Paying for school using a credit card may sound great in theory, but in most cases, it is a lousy idea.

However, there are exceptions to the rule. If you have money set aside to pay for school and your school doesn’t charge a convenience fee, you can get some serious rewards points. If you will be reimbursed for your payment and need a very short loan, a credit card might be the right choice.

Credit cards don’t usually work for paying for school, but when they do, it can be pretty slick.

The post Yes, Paying for College with a Credit Card can be a Smart Decision appeared first on The Student Loan Sherpa.

Repaying student loans with a credit card can have two major benefits:

1. Earning Rewards: By using a credit card, borrowers could quickly accumulate rewards and points, which can be valuable for travel, cash back, or other benefits.
2. Saving on Interest: Utilizing a credit card that offers a 0% introductory rate can provide substantial savings on interest payments, especially if the balance can be paid off before the introductory period ends.

Unfortunately, student loan lenders are not very accommodating. Instead of being willing to pay merchant fees, they require borrowers to make payments via a check or bank transfer.

Unfortunately, many student loan servicers do not accept credit card payments directly due to the merchant fees involved. They typically require payments to be made through checks or bank transfers, which can be a significant limitation for those looking to leverage credit card benefits.

Despite this challenge, borrowers have a couple workarounds to consider.

Work with a payment processing company

Companies like Plastiq enable borrowers to use credit cards for their student loan payments.

The process is relatively simple. The borrower provides Plastiq with the lender’s details. Plastiq charges the borrower’s credit card. It then uses those funds to pay the lender directly.

Plastiq makes its money by charging a transaction fee. At the time of writing, this fee is 2.9%. This means Plastiq will charge the borrower’s credit card $102.90 for a $100 payment to the lender.

Because of the high transaction fee, this approach usually doesn’t work for borrowers looking to earn rewards. Most credit cards offer a maximum reward rate of about 2%. In the case of Plastiq, this approach would result in a net loss of at least 0.9%. However, borrowers working towards a sign-up bonus with a credit card company might find this approach worthwhile. If the student loan payment helps meet the minimum spending requirement, it could make the transaction fee money well spent.

When using this strategy, you should keep a couple of considerations in mind.

1. Reputation: You should be certain you are working with a reputable company. The last thing you want is to be charged for the payment and the money not end up with the lender.
2. Timing: Make sure you start the payment process well in advance of your student loan payment due date. A processing issue could cause the wrong account to be credited or cause a delay and a late fee.

Convince your lender a credit card is the only way they will get paid

The problem with making credit card payments towards student loans isn’t that lenders can’t process credit card payments. The issue is that they don’t want to.

Instead of making a payment through the typical payment portal on the student loan website, call in and ask to make a credit card payment. Explain that payment via credit card is the only way you will be able to make your payment at the moment.

Borrowers who have fallen behind on payments and are now getting serious about their student debt will have the best chance of success with this approach.

When you call, it is helpful to ask the representative whether or not they have the authority to accept and process credit card payments. If they are not permitted to do so, ask to speak to someone who does.

Keep in mind, lenders differ in how they handle these requests, so the outcome can vary significantly from one lender to the next. This method requires persistence and may not always work, but it can be a viable option in certain situations.

Credit Card Payments for Student Loans are Risky

Borrowers considering using credit cards to pay off student loans should weigh the potential benefits against the risks carefully.

The best-case scenario from this approach might be a small net gain of 1-2%. While every little bit helps when it comes to student loan repayment, the gains from using a credit card could be minimal as compared to the risks.

Borrowers taking advantage of a 0% introductory interest rate should be especially careful. Once the introductory period ends, the interest rate jumps up to the “regular” interest rate. This rate could easily be more than 20%. That is a financial time bomb. To avoid this pitfall, anyone using the 0% interest rate to pay down student debt should be certain they can pay off the full balance before the promotional rate expires.

If your strategy involves continually transferring balances to new cards to maintain a 0% interest rate, then this approach is inadvisable. This strategy involves juggling multiple accounts and deadlines, and a single misstep could result in high interest charges. It’s generally just too risky and not worth doing.

Another factor to consider is the tax implications. Credit card interest cannot be deducted, but student loan interest can. If the numbers are tight, this difference could make using a credit card less financially advantageous than it appears.

Final Thoughts

Using a credit card to pay off student loans might seem like a clever strategy on paper, but in practice, it often falls short.

While there are specific situations where it might make sense, generally speaking, the complications and risks associated with this approach tend to outweigh the benefits. The effort to manage this method—keeping track of interest rates, handling balance transfers, and dealing with potential tax implications—can make it a less appealing option. For most borrowers, simpler and safer repayment strategies are usually more advisable.

The post Can I pay my Student Loans with my Credit Card? appeared first on The Student Loan Sherpa.

Credit cards are a little different. With just a little bit of effort, most people can tweak their credit card situation so that it helps their refinance efforts.

One of our readers had this question in mind when he wrote the following:

Hello,
I am interested in refinancing my student loans, but I heard that it would be in my best interest as far as interest rates go to reduce the available credit I have on my credit cards. Is this true? How does this work?

Best,
Jeff

Jeff is right and wrong. The available credit does make a difference in your application, but reducing it will only make things worse.

Understanding Debt-to-Income

There are a number of different factors that go into any credit approval or rejection decision.

Along with your credit score, one of the most important factors is your monthly debt-to-income ratio.

The debt-to-income ratio is how lenders determine your ability to pay. The more income you have each month, or the less debt you have, the better this number gets. If your monthly debt bills are low compared to your monthly income, your odds of approval are much better.

Credit Cards and Debt-to-Income

Whether you carry a balance or pay off your credit card in full each month, your credit card affects your debt-to-income ratio.

The key number with the credit card is the minimum amount due. This is the number that the computers will use when they do the math on your debt-to-income ratio.

Even if you are paying your credit card balance in full each month, you will note that there is still a minimum payment. You might also notice that as your balance gets lower, the minimum due gets lower. Keeping that number as low as possible will help your cause.

Credit Cards and your Credit Score

You may be thinking that if you just cancel your credit card, the minimum payment becomes zero.

While this is true, doing so will likely hurt your credit score, so it is best not to cancel the card. When lenders look at your credit report, having a credit card, paying your bills each month, and keeping the balance low will help your credit score greatly.

Another factor that goes into your credit score, as noted by Jeff, is your available credit. Lenders what to see a lot of available credit. This shows that you can resist the impulse to just max out your credit cards.

Most credit experts suggest that you use no more than 30% of your available credit, while others say that below 10% is best. The key number is the monthly statement. Even if you use the credit card well above the 30% available credit, if you pay off the debt before the credit card company issues the statement, it will show a very low balance and a high available credit.

This move will help your application numbers. If you have been with your credit card company a while, you might also consider calling to ask them to raise your limit (just make sure they don’t need to do a credit pull in order to do so). Even if you don’t ever plan on using the extra available credit, having it will help your credit score.

Your Timeline

One other thing to keep in mind is that the student loan refinance lenders do not have direct contact with your credit card companies. They get this information from the credit agencies.

The credit agencies get monthly updates from your credit card companies. That means that knocking down your credit card balance will not help you if you apply to refinance tomorrow.

You have to give the companies involved time to update the necessary information. The best practice would be to keep balances low for at least a couple of months. Going this route assures you that the numbers reported are good ones.

The Bottom Line

Getting your credit cards in order before you apply to refinance can really help your application odds of success.

The key is keeping your balance low and available credit high. Do this, and you give yourself the best chances at approval.

The post Credit Card Debt and Student Loan Refinance Applications appeared first on The Student Loan Sherpa.

However, before you decide on a strategy, there are a few factors that should be considered first.

Changing Interest Rates

Many student loans and credit cards have variable interest rates. As the economy changes the interest rate that you pay on your credit card or student loan can change. Typically, these changes are gradual, so a variable interest rate isn’t a huge consideration.

However, there are circumstances in which interest rates can change dramatically. For credit cards, it could be a case of a 0% promotional rate jumping up above 20% in a year. For student loans, the many options to refinance at lower interest rates could mean a major drop in your interest rates.

If you are looking at a major change in interest rates, it is probably worth your time to do a little math. Suppose you have a credit card balance on a card that currently has a 0% interest rate that will be jumping to 20%. On one hand, you want to take advantage of the 0% rate, but on the other, you really want to avoid paying 20%. In that instance, you might want to calculate how many months it will take to pay off the credit card balance. If it will take you 4 months to pay off the credit card, take advantage of your 0% rate until you have only 4 months left. At that point shift your focus back to the credit card to make sure you don’t get stuck with the huge interest rates.

Student Loan Forgiveness

If your student loans are federal loans, there are a number of forgiveness programs that should be on your radar. This is especially true if you have low-interest credit card debt and are considering paying off your student loan first.

The two most popular student loan programs are income-driven repayment loan forgiveness and public service loan forgiveness. Income-driven forgiveness happens after 20 years of payments on some plans and 25 years of payments on others. Regardless of which order you plan on paying off your debts, getting on an income-driven plan could be a good idea.

Public service loan forgiveness happens after just 10 years worth of payments on an income-driven plan. This could result in huge savings for those who work in government or for a non-profit. Before you plan on going this route, be sure you understand the details of public service student loan forgiveness and get started on the right repayment plan.

With these forgiveness programs in place, paying off your credit card first, even if it has a lower interest rate, may make sense. Of course, this will depend upon your balance, your employment, and your income; but it is something to consider.

Credit Score Consequences

One of the big considerations in determining your credit score is the amount of revolving credit you have available.

The most common type of revolving credit is a credit card. If your credit card debt is low compared to your available credit, it is very good for your score.

Surprisingly, paying off your student loans will not make as big of a difference in your credit score. If you are planning a major purchase, such as a house, and you have some money to pay down debt to run up your credit score, paying off the credit card first will likely get you the most bang for your buck.

[More from the Sherpa: Paying off student loans with a credit card sounds great, but does it work?]

Bankruptcy

If you are planning an aggressive debt repayment plan, it hopefully means that there is no bankruptcy in your future. However, if there is a possibility that you may be filing for bankruptcy in the future, you may want to shift your attention towards your student loans. This is because credit card debt can be dealt with in a standard bankruptcy proceeding, but student loan debt is very difficult to discharge and requires its own special proceeding.

If you are exploring this option and curious about how these rules affect your individual situation, you may want to consult a bankruptcy specialist.

Tax Deductions

Let’s say your credit card and student loans have the same interest rate. Which do you pay off first?

If all other things were equal, you would want to pay off your credit card first. This is because the interest that you pay on your student loans can be deducted from your taxes. It doesn’t necessarily make a huge difference as it is a deduction and not a credit, but this difference can make next April 15 go a little better for you.

The Big Picture: Balancing Credit Card Debt vs. Student Loans

When it comes to paying off debt, there are many strategies and approaches out there.

While the two most common are probably the snowball and avalanche methods, there is nothing wrong with coming up with your own.

The important thing is to recognize that having a bunch of debt is very expensive because you pay interest each month. The more debt you can pay off, the less interest you will owe. The sooner you get it paid off, the more you will save in the long run.

Whether you start with a student loan or a credit card, the ultimate goal is to get it all paid off as soon as possible. Find the path you think gets you there the quickest and go for it.

The post Should I pay off my credit cards or student loans first? appeared first on The Student Loan Sherpa.