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For many years, overusing credit cards was the pet peeve of personal finance experts. As consumers began to rely more heavily on credit to fund their lives—and subsequently struggled to pay off huge sums of debt—the personal finance world adopted a common refrain: If you can't afford to buy something with cash, you can't afford to buy it.
But in the last decade or so, the benefit of frequently using credit cards has become more apparent. Rewards programs have expanded, sign-up bonuses have grown and consumers have become generally more aware of how important it is to establish a strong credit history. Today, personal finance experts have a different refrain: If you can afford to pay the balance in full every month, use credit cards as much as possible.
So if charging as much as possible to the plastic in your pocket makes good financial sense, should you use your credit card to pay your regularly monthly bills, or stick to paying them from your checking account? Paying your bills with your credit card or checking account depends on several factors. When does it make sense to use a card, and when is it better to pay from your checking account? Read on for those answers and more.
Why Should I Pay Bills with a Credit Card?
Putting your monthly bills on a credit card might be good for you if:
You Want to Get the Most of Your Credit Card's Perks
If you find the right credit card for your needs, every dollar you spend can earn rewards, get you cash back or help you qualify for a sign-up bonus. A card with a $500 bonus, for example, might require a $3,000 minimum spend to get the bonus, which can be hard to reach unless you use it to pay bills. If you earn cash back or travel miles every time you use your credit card, paying your bills this way could earn you a free trip to Paris or a sizable statement credit on your account.
Paying your bills with a credit card can also give you access to purchase protection, depending on the card. For example, if you pay your internet bill with a credit card and your service cuts out frequently, you could request a chargeback through your credit card company if the provider doesn't give you a refund or discount.
You Pay Your Bills in Full Every Month
As long as you pay your credit card bill on time and in full each month, you generally won't see a negative impact on your credit score. In fact, regularly paying your credit card on time shows that you're a responsible borrower. If you don't have any other lines of credit, regularly using a credit card will help boost your credit score as long you pay it off each month. (See a possible exception regarding credit utilization ratios below.)
You Want to Ensure On-Time Payments
Using a credit card for bills can be helpful if you need to pay your rent or heating bill, but payday isn't until next week. In this situation, using a credit card can give you some wiggle room and help you avoid overdraft fees. However, make sure you pay the debt on your card once you get your paycheck. Putting bills on your credit card because you don't have the cash to pay them can lead you down a dangerous road and result in debt that could become unmanageable.
Which Bills Can I Pay with a Credit Card?
You can typically pay the following bills by credit card. Check with your providers to find out whether they charge a convenience fee to process your credit card payment. (If they do, it's usually smarter to pay from your checking account.) And look at the company's website or your paper statement to see what your options are.
- Utility providers
- Cable and internet companies
- Cell phone providers
- Subscription services
Typically, the following providers do not allow you to pay by credit card or charge fees for you to do so. Exceptions exist, however, so check with your providers if you'd like to pay these bills by credit card.
- Mortgage companies
- Auto lenders
- Auto and home insurance companies
- IRS and state tax collectors
- Student loan providers
Paying Bills with a Credit Card Could Impact Your Credit Score
One risk that comes with putting your bills on a credit card is the possibility of running up a balance and not paying it off in full. If you rack up $500 on a card and only make the minimum payment, you'll be hit with interest charges until the balance is paid off completely.
Even if you pay off your balance in full every month, your credit utilization ratio could increase and hurt your credit score. Credit utilization is how much of your available credit you use every month, and is the second-most important factor in your credit score. This factor can determine up to 30% of your credit score.
To determine your credit utilization ratio, divide the total of your current credit card balances by your available credit. For example, if your credit card balances total $4,000, and your total credit limit across all your cards is $10,000, your utilization ratio is 40%. A credit utilization ratio of 30% or more will likely decrease your credit score. Why? A high percentage makes lenders think you're relying too heavily on credit cards to fund your lifestyle. For the best scores, it's a good idea to keep your utilization below 10%.
A simple way to prevent high utilization is to pay your credit card bill twice in one month. Your statement balance is what's used to determine your credit utilization ratio, so if you can pay part of your bill off before the statement generates, you'll be able to keep your utilization ratio low.
Closing a Credit Card Can Hurt Your Credit Score
The average age of all your open credit accounts is another important factor in determining your credit scores. Every time you open a new loan or credit card, your average credit age goes down. A longer credit history shows potential banks and lenders that you have experience paying money back responsibly.
Closing old accounts will also influence your credit age negatively. If you've had a credit card for eight years and it doesn't fit your needs anymore, closing it may not be the best idea. Instead, keep it open and make a few small purchases with it every month. Let the statement close and then pay the balance off in full.
Consistently using an old credit card can be hard to remember, especially if your wallet is full of other cards you use regularly. But if your account is inactive for long enough, the credit card provider might assume you don't need the card and close it. Sometimes you'll receive a notice in advance, but it might come as a surprise.
An easy way to keep the account active is to schedule a recurring bill payment every month, like your Netflix subscription or gym membership. Make sure you don't assign too many recurring bills that increase the utilization past 30%. Then, set the credit card bill to autopay so you don't miss the payment.
When Should I Use a Checking Account to Pay My Bills?
Not all lenders or utility companies allow people to pay their bills with a credit card. Your landlord will probably not accept a credit card, and if they do, you'll likely be charged a processing fee of 3% or so. That will almost always negate any rewards you might see from the card. A $1,000 rent payment could net you $20 in rewards with a 2% cash-back credit card, for example, but cost $30 in fees.
Sometimes paying with a checking account can actually save you money. Some providers offer a discount when you pay with a checking account, because they don't have to pay for credit card processing. Call and ask if your service provider offers an incentive for paying in cash.
Bill autopay offers another advantage to using your checking account to pay bills. If you tend to pay bills past their due date, autopay helps you stay current and avoid late fees.
In addition, paying your bills through your checking account's bill pay function may soon allow you to improve your credit score. Experian Boost is new tool that can track your utility and telecom payments and, if you show positive payments for at least three months, you'll likely get an immediate boost to your credit score. Experian Boost will be available in early 2019, but you can visit experian.com/boost now to register for early access.
Want to instantly increase your credit score? Experian Boost™ will be available in early 2019 and helps by giving you extra credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your score.
This service will be completely free and can boost your credit score fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.