Using a Credit Card While Paying off Student Loan Debt

I still use a credit card while paying off student loan debt.

In the beginning of my debt free journey I was an adamant Baby Stepper and Dave Ramsey fan. Read about my plan to get out of debt here.

The principles of the Baby Steps still apply to my debt freedom approach, however they don’t fully fit into my personal goals. Traveling and going out to local restaurants are things I definitely wanted to include in my budget.

Note that one of the most important things to have is an emergency fund for major expenses that can surprise you. My EF is $1,000 in a savings account linked to my checking account. It doesn’t seem like a lot, but because I’ve been better with my budget and anticipating car maintenance/other expenses, I haven’t had to use it at all.

Weigh the pros and cons before you decide to use credit.


Uses for credit

As we all know credit is a tool to buy something that you don’t currently have the money for. You then pay it back with added interest later.

A credit score is how the financial world grades you as a borrower.

Banks and credit unions can issue a credit card with a maximum spending limit (credit limit) based on your income and credit score.

Credit score is calculated based on 5 things:

  1. 35% Payment history
  2. 30% Current loan and credit card debt
  3. 15% Length of credit history
  4. 10% Types of credit
  5. 10% New credit

Learn more about this here. 

Your credit score affects your limits to borrowing money as well as the interest rate.


Credit Utilization Ratio

A big portion of your credit score is the Credit Utilization Ratio. Read more about it here.

A good CUR is 30% or less of your credit limit. If your credit limit is $5,000 you should only spend $1,500 to have a 30% CUR. Your credit score will drop if a balance above $1,500 is maintained.

Another way to increase your credit score is to increase your credit limit while maintaining less than 30% utilization. Most credit cards will base your credit limit on your annual income if you provide it to them.

The better the credit score, the better chance you’ll have to borrow more money with a low interest rate in the form of a loan: home, auto, student loan, etc.


Negative side of using a credit card

When you don’t see money coming out of your wallet you’re more likely to overspend. You’re likely to become more frugal if you only use cash.

Christmas was the worst of it for me! I went way over budget because I charged my credit card. This was money I could’ve put toward my student loan.

Be aware of the annual membership fee due date. It’s easy to forget to budget for this. 

Most credit cards have a high interest rate. If you let a balance linger you’ll likely be charged interest. If you buy something in full and with cash, you obviously do not risk having to pay interest on the purchase.

The purchases on your card don’t always post on your current balance right away. It will take a few days to post, and by then you’d already forgotten how much you’ve spent and have probably used it more times since.

Penalty fees apply if you pay your bill late.


Credit card perks

Contrary to the negative side of credit cards, they do offer a sense of freedom. You’re free to buy things as you see fit and don’t have to wait until the next paycheck or save the money to do so.

Depending on the type of credit card you have, there are different perks:

  • Balance Transfers
  • Cash Advance
  • Cash Back
  • Discounted Gas
  • Grocery Points
  • Redeeming points for Gift Cards
  • Travel (flights, hotels, car rentals)


Chase Sapphire Preferred

This is the only credit card I’ve had for the last 3 years. As of February 2020, it’s listed as one of Nerd Wallet’s top pick for Travel Rewards.

The annual fee is $95, interest rate for purchases is 17.49%, and 24.49% for cash advances.

To avoid paying interest I control my spending and pay this off each pay period. For example: I budget $60 for gas every week, so I’ll use the Chase card for the purchase then transfer the money from my debit card to the credit card later that day.

My fiance & I have traveled to Cabo San Lucas, Mexico, and Austin, Texas for half the price using the points! There are also perks when booking through Chase Travel such as Travelers Insurance.

If you’d like to sign up for this credit card and earn 60,000 bonus points, I can be rewarded, learn more here.


Use at your own risk

I have only one credit card because I know that if I had more, it’d get out of hand quickly.

You should always make paying off debt a priority first. It’s been tricky for me to balance both, but after careful budgeting and usage I’m now able to use my credit card responsibly.

Choose whichever card works best with your financial goals with the least risk. Read Nerd Wallet’s 17 Best Rewards Credit Cards of February 2020 here.


Millennial Challenge

  • How has using a credit card affected your ability to pay off student loan debt?

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