The Case Against Paying Rent with a Credit Card
In 2020, at the height of the COVID-19 pandemic, the number of Americans putting their rent payments on a credit card was up nearly 70% over the prior year. Extraordinary times call for extraordinary measures, and if charging rent is what it took to keep families safe and housed, then it was the right thing to do.
Generally speaking, however, charging rent payments to a credit card is a bad idea. While it certainly adds convenience and can help keep you afloat if you’re short one month, the cons largely outweigh the pros – especially if you’re charging rent on a regular basis.
If you’re thinking of using a credit card to cover your next rent payment, consider the following reasons why you shouldn’t.
Most sizeable apartment complexes and rental management companies offer some form of online payment portal, where you can make payments through a bank account or credit card. Even if you rent from an individual landlord who’s not set up for online payments, there are a ton of services that still allow you to make rent payments via credit card. Plastiq and RentTrack both process credit card payments and send them on to your landlord on your behalf (usually in the form of a paper check).
Another feature all of these services have in common is hefty fees. Most charge a service/processing fee on credit card payments of just below 3% of the rental payment. If your rent is $1,000, for example, you may be charged an additional $25-30. Taken as a one-time fee that might seem acceptable, but if you’re making every payment this way, you’ll end up spending an extra ~$300 in fees on the year.
While there are plenty of credit cards out there with great rewards programs, it’s unlikely that any points or cash back reward is going to be worth more than the cost of the service fee.
Beyond the immediate processing fees, charging your rent also opens you up to potential interest fees if you haven’t repaid the bill before the end of the associated billing cycle. The amount of these interest fees will depend on the terms of your credit card and how long it takes you to repay the borrowed rent. If it takes you multiple months to complete your payoff, you’ll likely be accruing additional interest charges every month along the way.
No matter how long it takes to pay off your credit card, you’re better off not spending money on interest charges if you can help it.
Reduced available credit
Most of us have a finite amount of credit available. Even if you have a fairly large credit limit, charging your monthly rent means two things:
- There’s less credit available for other needs or emergencies. The credit tied up in your rental payments won’t be available again until you repay that debt. In the meantime, you may be financially shorthanded, particularly if you need to make another large purchase, or if you run into an emergency and need to access a large portion of your credit limit.
- Your credit may take a temporary hit. Nearly all credit scoring models base some percentage of your credit score on the amount of available credit that’s currently in use. The closer you are to your credit limit, the more negatively your score will be impacted. In other words, the lower your credit utilization ratio, the better that is for your credit score.
What about emergencies?
Of course, the reason credit card charges for rent were on the rise in 2020 is because many families had limited income and couldn’t afford to pay their rent any other way. It’s perfectly okay to use credit to help survive a crisis situation – that’s one of the primary reasons why you work so hard to have a strong credit history in the first place.
There are some instances, however, where you should make sure that using credit isn’t doing more harm than good.
Are you always one payment behind? If your rent is due before your next paycheck, it’s natural to turn to credit to tide you over. But if your rent is always due before your next paycheck, you may need to make some changes to your budget so that you’re not spending paychecks before they hit your bank account.
Are you always just a little short? If you’re using credit to cover a persistent shortfall in your budget, you may be walking a dangerous line, especially if your debt keeps going up and up. It’s possible you don’t have enough income to cover your expenses. Fortunately, there may be simple tweaks you can make to even out your spending and stop relying on credit.
There’s no shame in using credit cards to manage an emergency. But if you’re continually relying on credit to help cover major expenses like rent that may be a sign of growing financial problem.
If you need help reviewing your debts and creating a spending plan, MMI offers free financial counseling, available 24/7. Connect with an expert today.