Paying rent using a credit card? These common mistakes could lower your CIBIL score

Using a credit card for rent payments might seem convenient, especially for those who seek to manage cash flow or earn rewards. However, the convenience can come with significant costs if you are not careful about how you use your card.

Though it's not usual for landlords or PG owners to accept rent payment via credit cards, it still may not be the best choice even if they accept it, due to the extra charges involved, impact on your credit utilisation, among other issues.

Credit card rent payments can come with extra costs

Holders must know that using a credit to pay rent may involve additional fees as many landlords and property management companies charge a processing fee for credit card transactions. The same applies for whether you are paying your rent or monthly maintenance fee (if any) using a credit card.

This fee can range from 1% to 3% of the rent amount and can inflate your monthly rent payments, according to a blog post by AU Small Finance Bank.

If your monthly rent is ₹20,000, a 2% fee means ₹400 a month, or ₹4,800 a year, that too before taxes.

Additionally, there may be restrictions on the types of credit cards that are accepted for the purpose or limits on the amount that can be charged.

Unpaid rent bills can become expensive

One of the biggest risks of paying rent with a credit card is the interest cost. If you don’t clear the full bill by the due date, the outstanding amount can attract high interest, making your rent significantly more expensive.

Any additional processing fee charged for the transaction can further increase the cost, making it an unviable option to use credit cards for rent payments unless it's an emergency or extremely necessary.

You can fall into debt trap

Like we mentioned above, paying rent using credit card is fine if it's an emergency or you are sure that you would have the money soon to clear your dues in full within the due date. This is because paying rent with a credit card can lead to debt accumulation if you are not careful.

Many monthly expenses can be adjusted or cut back, however, rent is a fixed cost that you must pay every month. If you heavily rely on your credit card every month for rent payments, it may lead to a debt trap.

Don't forget that rent uses up your credit limit

If you use a large chunk of your credit card limit to pay rent, it can push up your credit utilisation ration. For instance, if your credit card limit is ₹1 lakh, and you are paying ₹30,000 as rent, that means your 30% of the available limit is already gone, even before other expenses.

This can negatively impact your CIBIL score as credit utilization, or the amount of available credit you are using, is a major factor in determining your credit score. High utilisation can lower your score, making it harder to obtain credit or other loans in the future.

Most banks and lenders advise credit card holders to keep their credit utilisation below 30% to maintain a healthy credit score.

Paying only the minimum due can push up costs

Paying only the minimum due may keep your credit card account in good standing, but the remaining balance can attract interest.

If you carry forward your rent payment, what started as a fixed monthly expense can quickly become more expensive.