Charge! From everyday purchases to splurges, consumers often turn to credit cards. Some Americans even reach for the plastic to pay the rent. But is paying rent by credit card a good idea? Is it even allowed? The answer to both questions: It depends.
By late 2020, there had been as much as a 70% increase in the number of people paying rent by credit card, compared with the year before, according to data from the Federal Reserve Bank of Philadelphia.
And in light of pandemic pressures, landlords around the country had begun waiving or reducing fees for using credit cards to pay rent.
Let’s address questions and look at pros and cons of charging the rent in any economic climate.
Do Landlords Allow Payment by Credit Card?
For renters tempted to reach for the plastic, the first likely question is whether this mode of payment is even accepted. The answer will depend on the landlord, though many do not allow it.
The reason: Accepting credit card payments incurs fees for the merchant.
When people make a purchase on a credit card—whether they’re buying household items, a car, or paying the rent—they are essentially taking out a loan from their credit card company, which advances the money to the merchant (or in the case of rent, the landlord or property management company).
credit score.
As such, individuals may want to leverage credit cards for flexibility only if they are sure they’ll have the money available when their credit card payment becomes due.
Benefits, Including Cash Back
While there are many basic credit cards on the market, there are also credit card products that reward people for spending—in the form of cash back, points that can be redeemed toward travel and other perks, and other benefits.
The cost of housing consistently ranks as Americans’ greatest annual expenditure (based on percentage of total annual spending), according to the Bureau of Labor Statistics. For those with reward cards, this means paying rent by credit card can represent the greatest opportunity to rack up spending and earn those perks.
But it’s important to do the math. Third-party fees or credit card payment surcharges can cancel out any benefit a cardholder may earn, or even ultimately cost more if fees are greater than the reward offering.
Cons of Paying Rent With a Credit Card
Charging the rent can be a risky proposition. Regularly paying the rent by credit card because of a lack of money on hand can be a sign something is wrong financially, whether because of emergency circumstances or poor budgeting.
If you regularly charge the rent out of necessity, it merits taking a closer look into the root causes and how they may be addressed in your monthly budget.
But there are additional reasons why paying rent with a credit card may not be a good idea.
It May Cost More
As discussed, some landlords and third-party payment companies may tack on a surcharge for credit card payments.
Let’s say the surcharge is 3%, or an extra $30 on $1,000 in monthly rent. While that may not sound like much, it adds up to $360 a year, money some individuals may prefer to spend elsewhere.
Landlord surcharges are not the only thing that can make it more expensive to pay rent by credit card. When cardholders pay by the due date, they are only on the hook for the amount they agreed to pay. But making a credit card payment even a day late can increase the total amount due, thanks to interest charges. And the later the debt—in this case rent—is paid, the greater the interest charges will be.
Though interest rates vary by credit card, they are often higher than other lending products like personal loans.
The average credit card annual percentage rate exceeded 20% in early 2021. Worse, the interest compounds, so each month that cardholders do not pay off the rent in full, they will incur interest on both the balance and interest that has accrued.
It Can Affect Credit Score
Your credit score reflects your creditworthiness, or the risk you pose to lenders. The number (300 to 850 for the FICO® Score and VantageScore models) affects how likely it is for you to be approved for another credit card, or a mortgage or other loan, and the interest rate you will have to pay.
Regularly missing credit card payments will negatively affect your score. Because rent tends to be a significant expenditure, you’ll want to ensure that you will have the funds on hand to pay the balance in full if you choose to charge the rent.
But even on-time payments can affect a credit score. Scores are based in part on an individual’s credit utilization ratio—the proportion of credit being used relative to the total available amount.
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Source: sofi.com