Credit Cards » Credit Card News » Loan Payments Using Credit Cards A Bad Move But Getting Popular
Date June 20, 2009

Loan Payments Using Credit Cards A Bad Move But Getting Popular

As the economic crisis continues, more and more American consumers are finding themselves barely able to pay for basic utilities. Mortgages, car loans and student loans are becoming more difficult to pay off as less and less cash is available. Many American consumers are turning to paying off these loans using credit cards and the service is getting even more convenient as it has just gotten online.

Loan Payments Using Credit Cards A Bad Move But Getting PopularCurrently, there are a few online companies that are offering credit cardholders the chance to payoff their loans and bills online using their credit cards. These companies offer cardholders who pay their bills every month many attractive incentives. One such company, ChargeSmart, allows cardholders to pay for auto loans, auto leases, mortgages, student loans and utilities online using their credit cards.

Philip Mikal, Chief Operating Officer of ChargeSmart said that the company is not targeting borrowers having debt problems. According to him, while the company has processed more than 1,000 transactions since its launching, only 1% to 2% have been for delinquent accounts. He stressed that the majority of their customers were smart spenders who wanted to maximize their rewards program by using ChargeSmart’s service.

Major credit companies are also seeing that loan and utilities payment are an untapped source of income for credit card transactions. American Express was one of the first companies to see this opportunity and embrace it. In 2003, the company allowed luxury rental payments and, in 2006, it allowed luxury condominium down payments. In May of 2007, American Express introduced its Express Rewards Mortgage program to encourage even more cardholders.

IndyMac Bank and American Home Mortgage were the first lenders to offer American Express’ service. When these two companies collapsed during the sub-prime mortgage crisis, American Express found itself highly exposed. However, it may have not given up on the idea just yet. Sarah Beron, spokeswoman for American Express stated that the company is evaluating the Express Rewards Mortgage program to determine what it will do next.

The problem with these kinds of practices is that it violates a long held rule in finance: Never borrow from Peter to Pay Paul. There is wisdom in this rule. When credit cardholders use their credit cards to pay their loans and mortgages, they are only digging themselves deeper into debt. If the practice continues, it could endanger not only the credit cardholders but it could bring the sub prime loan crisis into the credit card industry, further worsening the credit crisis.

Date May 29, 2009

College Students and Credit Cards

According to a recent study, college students comprise one of the many groups of cardholders that have been hit the hardest by credit card debt.

College Students and Credit CardsAccording to a survey by Sallie Mae, a lender focusing on student borrowers, this April of 2009, college students on the average own four credit cards or more. Most college cardholders are also not very good at keeping up with their monthly payments. A majority of college cardholders regularly get hit by large monthly finance charges because they can’t pay their monthly credit card bills, according to the survey.

Most worrying of all is the steep rise in the median credit card debt amount of freshmen college students. Whereas the median amount was at $373 during 2004, now it is at $939. This means that even while they are still starting out in college, students are already getting buried in debt. If they are not able to recover, these college students will most likely carry large debts once they graduate. This could be a heavy burden for them, especially when they are just starting out with their careers.

College students are often one of the most active consumers that credit cards have. Although most of them rarely charge big ticket items, smaller purchases do add up to become large debts. The availability of student loans has also recently dried up, forcing many students to use their credit cards for many college expenses. Credit cards are also readily available for college students. They also offer many attractive incentives and freebies. Some credit cards even have arrangements with a few colleges for marketing purposes.

Many observers see that the lack of essential financial education among college students is the root cause of the problem. College students are also not the only sector of the overall population of credit cardholders who need some financial education, judging by what recently happened with the economy.

Using credit cards is not problematic, per se. It only becomes a problem when cardholders do not keep up with their monthly payments. There are many reasons why this may happen. One of the most common is cardholders charging items on their credit cards without really considering if they can pay them off or not when the monthly bill comes.

Because of the bad press that credit cards are getting, some people are turning to debit cards. However, debit cards also have pitfalls. One of the worst pertains to overdraft charges. Overdraft charges happen only with debit cards that include overdraft protection, usually debit cards connected with credit cards. Banks charge $34 on the average for debit card overdrafts.