Credit cards can be a great tool for making your life more convenient, and that includes paying your bills. To stay on top of your expenses, paying bills with a credit card can help, says Tasha Bishop, director of operations and development at nonprofit credit counselor Apprisen.
“The more you can automate, the better,” she says, adding that setting up your credit card to automatically pay your monthly expenses — including utilities, cellphone costs and various types of insurance — gives you one less thing to worry about each month.
“It automatically gets paid, and you can feel confident that you’re not going to get any late fees or you’re not going to miss a payment simply because you’re busy with other things in life,” Bishop says.
However, this method of paying bills is not for everyone. If you aren’t careful, it can be the gateway to financial grief.
“It’s important to know what kind of spender you are, and where you’re at in your financial life,” Bishop says. “And that’s really going to make the decision on whether this is a good idea for you.”
Advantages of Using Your Credit Card to Pay Bills
Using a credit card as a tool to make monthly payments makes sense if you do it responsibly, says John Ulzheimer, president of The Ulzheimer Group and a national expert on credit who formerly worked with Equifax and FICO.
In addition to convenience, paying bills with a credit card offers other advantages. “At the very least, you’re earning rewards points or miles or whatever kind of benefit you have with your rewards card,” he says.
[Read: The Best Rewards Credit Cards of 2018.]
As an example, imagine your average monthly credit card balance includes bills that add up to $725. Some of these expenses might include:
— $250 for condo insurance and association dues
— $150 for cable and internet service
— $150 for gas, water and electricity
— $100 for car insurance
— $75 for cellphone service
If you earn even 1 percent cash back on those purchases, you will earn back about $87 over the course of a year. If you earn 1 mile for every dollar you spend, you could end up with 8,700 miles.
Paying your bill by credit card allows you to keep banking and debit card information out of the hands of your service providers. Credit cards also offer better financial protections than debit cards if they’re used fraudulently. And by not having your bill payments linked to your bank account, it’s less likely that a thief will illegally tap into the money and drain the account.
Using your credit card to pay bills also simplifies your finances. You will make just one payment for most of your bills — all on the same day — and can more easily track your spending.
“You’re going to have all your bills and spending in one place, so you can better see what you’re spending throughout the month, and also go back easier to see how your trends are changing in each of your bills,” Bishop says.
Drawbacks of Using Your Credit Card to Pay Bills
For starters, Ulzheimer says putting too much debt on a credit card raises your credit utilization ratio. That ratio marks the amount of debt you have charged relative to the overall amount of credit available to you.
FICO — the creator of the FICO score, the most widely used credit score — says the amount of credit you are using makes up 30 percent of a credit score. So, a higher ratio typically lowers your credit score.
Ulzheimer says consumers who have a card with a relatively low credit limit are especially at risk of raising their ratio by paying bills with the card every month while also using the card for other day-to-day purchases.
[Read: The Best Credit Cards for People with Fair Credit.]
“To the extent that you’re charging your bills on a card with a $25,000 or $30,000 limit, that’s immaterial,” he says. “But if you’re doing it on a card where your limit’s $1,000 or $2,500, then it can be problematic.”
Also, paying bills on a card every month might tempt you to carry over part of the expense from month to month. That will increase the amount of interest you pay on the debt, which can quickly wipe out the benefit of any rewards from using the card to pay the bills.
Ulzheimer says you can quickly get into a situation where you are “enjoying the ascending amount of rewards points in your credit card rewards program, but at the same time you’re perpetually, heavily leveraging that card and penalizing your credit score.”
Another potential downside is that some providers of services might charge a small fee when you pay your bill via credit card. For example, a utility might charge you a fee for paying an electric bill on a credit card, or a college might charge you for paying tuition. Even paying your federal taxes via credit card will incur such a fee.
Bishop says fees are an issue when trying to use this payment method. “Most of the time when they do accept credit cards, they’re charging some sort of convenience fee for that, because they have to pay a fee,” she says. Such a fee can be a flat dollar fee, or a percentage of the amount you are charging.
In addition, many providers of services will not allow you to pay bills with a credit card. “You are limited in what you can pay on a credit card,” Bishop says. “Places like mortgage companies, car loans, all those rarely accept credit cards.”
But Bishop says the biggest risk of paying your bills with a credit card is a life event — such as an unexpected financial emergency — that derails your intention to pay off your bill each month, and leaves you carrying a balance instead.
“If you have some kind of financial emergency or something comes up and you don’t pay that bill on time, then you’re going to accrue interest on all those bills,” she says. “Any rewards that you may have earned are going to be negated by the additional interest.”
Alternatives to Paying Bills With a Credit Card
Before you rush out and use a credit card to pay your bills, it’s important to weigh your alternatives. Ulzheimer says there can be several other options that might make more sense.
“You could certainly pay with a debit card,” he says. “You could certainly have your payments auto-drafted out of your bank account. Or, you could wait for your bill to come in the mail and you could write a paper check.”
Another way to pay bills without using a credit card, Bishop suggests, is to turn to a smartphone app that pays bills automatically.
“Most of them have some sort of budget tracker that can help you build your financial health and also help you automate your bills,” she says, adding that she is especially fond of apps Prism and Quicken. Keep in mind you still need to attach a credit, debit or prepaid card or bank account to the app to draw the payments from, so think of payment apps as more of an organizational tool.
[Read: The Best Cash Back Credit Cards of 2018.]
If you decide to use a credit card to pay your bills, make sure you are cognizant of how close your balance is creeping toward your credit limit. Many experts suggest keeping a ratio of no more than 30 percent, but Ulzheimer believes in being even more cautious if you want to ensure the best possible credit score as a means of landing the best loan rates.
“I always tell people to shoot for less than 10 percent when you are about to go out and apply for a loan, because you want that percentage to be as low as possible,” he says.
Ulzheimer acknowledges that 10 percent can be unrealistic for some people. So, he suggests paying down your loan at regular intervals — even several times a month — as a method of keeping your ratio lower.
“You can pay your credit card as many times as you want during the month,” he says. “You don’t have to wait for them to send you a statement before you pay the bill.” Using this approach will ensure your balance is lower when the lender reports your information to the credit reporting agencies.
In the end, the decision to pay bills by credit cards is a personal one. If you don’t typically manage credit cards responsibly, paying bills with a credit card could compound existing financial problems.
But using plastic to pay your bills can be a boon if you have the discipline to pay off the card every month. Bishop says, “This can definitely be a way for you to earn extra rewards and make the system work for you.”
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When Is it a Good Idea to Pay Bills With a Credit Card? originally appeared on usnews.com
