Ask 4 Questions Before Paying College Tuition With a Credit Card
From airline miles to free hotel nights and cash back rewards, the perks of paying with plastic add up fast.
So it may be tempting for families already shouldering the cost of college to want to cash in on those benefits when paying tuition.
After all, charging the fall semester bill to a credit card could earn Junior a free Thanksgiving flight home. Paying for spring semester with plastic could net a few hundred dollars toward a laptop.
Of the 300 largest public, private and community colleges, 87 percent accept credit cards for tuition payments under at least some circumstances, according to a survey from CreditCards.com.
But paying with plastic has its risks.
Here are four questions to ask yourself before charging tuition to a credit card.
1. Is there a fee for that? Covering tuition with a credit card carries an average convenience fee of 2.62 percent, according to the CreditCards.com survey.
That may seem small at first, but it can add $262 to a $10,000 bill, easily wiping out a 1 percent cash back offer or double miles bonus. "The math starts to work against you pretty quickly," says Matt Schulz, senior industry analyst at CreditCards.com, who also contributes to the U.S. News My Money blog.
Not every school levies a credit card fee against students. But of the schools surveyed, just 23 four-year institutions accepted credit card tuition payments from undergraduate students without fees or restrictions. Community colleges tended to be more generous.
[Weigh the pros and cons of a community college bachelor's degree.]
2. Can I pay off my card each month? It might be tempting to use credit in place of a student loan when money is tight and tuition is due.
But that gets expensive fast, say experts.
Federal student loans carry interest rates between 4.66 percent and 7.21 percent in the 2014-2015 academic year, depending on the loan.
A typical credit card rate was between 13 and 16 percent at the close of last month, according to Bankrate.com, which aggregates rate information on financial products.
Neglect to pay off the balance each month, and the extra interest could compound quickly.
The biggest risk to paying with a credit card is not paying it off in time and finding yourself slammed with tons of interest, says Brian Kelly, founder of ThePointsGuy.com, a site about maximizing rewards on credit cards. That would wipe out any rewards earned on the transaction as well, he says.
In addition to avoiding the risk of compounding interest, student loan borrowers, who meet various eligibility requirements, gain access to alternative repayment plans, such as income-based repayment, loan forgiveness and a student loan interest tax deduction. Those are benefits a credit card repayment plan won't offer.
3. Will it ding my credit score? Credit reporting agencies look at the credit utilization ratio, the amount of available credit a borrower uses, to determine a person's credit score.
Experts recommend keeping the ratio below 30 percent, meaning that someone paying a $10,000 tuition bill would need to have access to more than $30,000 in credit to stay below that threshold.
"It is a very important portion of a credit score and formula," says Schulz. "If you charge $15,000 in tuition that would put a serious hurt on your utilization ratio."
[Learn how student loans affect your credit score.]
Empty-nesters, seeking to buy a new home, for example, might want to avoid doing anything to jeopardize their score and make qualifying for a mortgage more difficult.
4. Can I handle it? If a parent has enough cash on hand to repay the credit card bill immediately, a generous credit limit and is sending their child to a school that charges no credit card fees, then it may make sense to use that card to pay for tuition.
But it's still risky, says Beverly Harzog, credit card expert and author of "Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made."
[Find alternatives to a student credit card.]
"You're walking a high-wire when you're doing these kinds of things," she says. "Be ready to take that risk."
And students should avoid the strategy completely, opting for student loans instead. "Students generally have less credit education and are more susceptible to making mistakes and missing payments," says Kelly.
After all, taking on student loan debt is burden enough without adding credit card repayment to the mix.
Trying to fund your education? Get tips and more in the U.S. News Paying for College center.
Susannah Snider is an education reporter at U.S. News, covering paying for college and graduate school. You can follow her on Twitter or email her at ssnider@usnews.com.
