I heard it asked on a couple occasions – can I pay for college with a credit card? Before you laugh and think it’s a terrible idea, I caution you to think it through for just a second. I would say it’s potentially a terrible idea. If certain criteria are met, it may not actually be as crazy as it sounds. But, there are numerous disclaimers that must be met before we go ahead and say credit card payments for college are worth doing. Let’s unpack it.

Why Would You Do This?

I think the main reason why someone would do this is simple, to get some points! I certainly won’t downplay the ability to earn credit card points. They serve as rewards that you can redeem on dollars you would’ve spent anyway – so why not maximize them?

There are certain credit cards that offer a bonus for spending a certain amount in a given time period, for example, $2000 spent on the card within the first 3 months. The bonus sign up offer can be substantial at times, meaning it can make a lot of sense to pursue. In the event you’d have a card that offers cash back or reward points on dollars spent, the purchase can also provide benefits outside hitting the initial sign up.

Example

Let’s take a look at an example. There are many cards on the market that offer an intro cash back bonus. But some of them have annual fees and other criteria by which you need to follow. I researched for specific ones that offer:

-no annual fees

-an intro cash back offer

-competitive earning possibilities.

I landed on the Chase Freedom Flex card. I want to be very clear – this is not a recommendation to take this card out, nor do I have any affiliation with Chase Bank. This is simply research on my end. If you’re planning on utilizing this strategy, I highly recommend you talk with an advisor first to make sure this card makes sense in your financial plan. This plan could make sense regardless of whether or not you’re using credit card payments for college. That said, there are a couple things that make this card competitive. Here they are:

-You can get $200 cash back after you spend $500 on purchases in the first 3 months after the account opening.

-There’s a 15 month 0% APR for purchases and balance transfers, but there is a balance transfer fee if you’re going to be transferring a balance (for the sake of our usage – I won’t be including any balance transfers).

-You can earn points a number of different ways:

              -5% on bonus categories that can be updated each quarter

              -5% on travel purchased through Chase’s Ultimate Rewards Program

              -3% on dining and takeout at eligible restaurants

              -3% on drugstore purchases

              -1% on all other purchases.

It’s a pretty dynamic card in terms of its offerings.

To be clear, this is one example and can and should be utilized under the right conditions.

Why You Shouldn’t Do This

Let’s cover the disclaimers and the reasons not to pursue credit card payments for college.

The first is that there is absolutely no validity to this plan if you don’t have the funds to pay off the credit card balance immediately. In other words, if the cost I’d like to finance to the school is $4,000, and my credit limit is $5,000 – great, I can make the purchase! But if I don’t have that $4,000 sitting pretty in my checking, savings, or a safe and accessible place that I can immediately pay off the debt, I’m playing a fool’s game. The interest on the card is almost assuredly going to be in the double digits and will immediately start racking up finance charges if I don’t pay anything other than the statement balance on the due date.

There are cards that offer 0% interest rates for an introductory period, so you could make an argument there, but I would be concerned with the discipline required by an individual ready to say “eh, I’ll figure it out along the way.” You should have a plan to immediately pay off the debt without fail.

Utilization Is an Important Factor

The second reason why you should be wary of this strategy is your credit score & utilization. There are a number of factors that make up an individual’s FICO score, but two that are important are the recent inquiry check and the individual’s credit utilization rate. The more hard credit checks you have in a short period of time, the more your score will be negatively affected. Nearly any time you take a hard credit “pull,” your score will likely take a brief hit.

Assuming you pay on the debt on time for a period of consecutive months, your score is likely to recover and even increase. So this factor could be overcome with proper planning. The utilization score is important to factor due to the fact that you card will be utilized in some capacity. The more credit you’re utilizing, the more your score would drop. Again, assuming you have the funds to pay this off immediately, this would only be a temporary blip. If not, you could notice a steep drop in your score for an extended period of time.

What about the school? Can they accept Credit Card payments?

This is a big question that will also determine if this plan is worth it or not. Most schools should be able to process a credit card payment, but there are some will do so with an additional fee. Therefore, you need to do some analysis to determine if it’s a worthwhile strategy. For example, if you earn 1.5% points on your card’s purchase, but the school charges a fee of 3%, you’ll need to analyze how much you’re putting on the card, in addition to any sign up bonus points. That will determine if it’s a move worth making. Here’s an example of the previously mentioned card at a PA school:

Example: Marywood University

Located in Scranton, PA, Marywood has on their site that they use a third party for credit card payments. There is a service fee of 2.85% when paying via credit card. As a result, the card would earn 1% on the cash back of this purchase. So let’s analyze.

A $500 purchase would cost $14.25 in finance charges, and you’d earn $5. But your $200 bonus cash back would lead to a sizable gain overall! In this case, assuming all other factors have been met, it could make sense to make this purchase.

In the event you’ve already hit the $500 bogey, however, the purchase wouldn’t make sense, as you’re comparing a 2.85% fee vs a 1% reward, in which you’ll never catch up.

Conclusion

I can’t stress it enough – this plan only works with the proper due diligence. It can make financial sense if the points are substantial. But credit card payments for college should be taken with caution. It can also be a strategy worth pursuing if you have the funds readily available to pay off your card without bearing any interest charges and you’re aware the impact it’ll have on your credit. Lastly, check to see with the school if they a) accept credit card payments & b) charge any additional processing fees for them. As always, consult an advisor if you have any questions!