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Paying rent with a credit card: How it affects your finances – Pros and cons

Credit cards: Paying rent with a credit card can help accumulate points and build credit, but it also has disadvantages like fees and interest. Weigh the benefits against the risks and consider your financial habits before deciding if this method suits you.

Dakshita Ojha
Published9 Jan 2025, 12:00 PM IST
Is paying rent with a credit card a smart move? Let's weigh the pros and cons.
Is paying rent with a credit card a smart move? Let’s weigh the pros and cons.

Using a credit card to pay for rent might be a good strategy to accumulate points and build up credit, but there are also disadvantages. To determine whether or not this approach is suitable for your financial situation, it will help to be aware of the dangers and advantages.

Also Read | HDFC Bank changes rewards program: What’s new and what’s gone?

Understanding credit cards

A credit card is a financial tool issued by a bank or any other financial institution that allows you to borrow money up to a specific limit. Of course, it's just another form of purchase loan with just a short term of a lifetime. You pay the remaining amount after using a credit card, and because of this, the issuer can pay the merchant on your behalf.

How does credit card rent payment work?

  • Processing charges: When you pay with a credit card, most landlords or rental agencies charge a processing fee, which is usually two to three percent of your rent.
  • Cash advance fees: Instead of considering rental payments as common transactions, some credit card issuers consider them as cash advances. Cash advances are often characterized by higher interest rates and other fees.
  • Interest on past-due payments: You will be charged interest if you do not pay your credit card account in full and on time; thus, the cost of your rent can be very high.

Factors to consider before paying rent with a credit card

  • Fees: Using a credit card to pay rent almost always comes with other fees, such as processing fees.
  • Interest-based fees: If you cannot pay your credit card, then interest rates have the power to transform what might have seemed to be a reasonable choice into an expensive one.
  • Effect on credit score: Paying with your credit card for rent increases your credit utilisation ratio, which can further reduce your credit score.

Also Read | How to get an HDFC Bank pre-approved credit card? Step-by-step guide

Pros of paying rent with credit cards

  1. Earn rewards: Earn cash back or credit card rewards on rent payments. Compare this to your total cost, then subtract fees charged.
  2. Build credit: Establish or rebuild credit history by making periodic rent payments through your credit card and always making full, timely payments.
  3. Avoid late rent penalties: Your credit card payment ensures that you do not incur late fees because it guarantees the landlord is paid on time, even if you are short of cash.
  4. Security of payments: In addition, credit card networks often provide extra protection, such as the ability to dispute unauthorized charges.

Cons of paying rent with credit card

  1. Expensive fees: This is an expensive option since processing fees, cash advance fees, and interest can add up fast.
  2. Debt risk: Using a credit card to pay for a large payment such as rent can lead to overspending. High interest rates can create a debt cycle if you do not pay off the remaining balance.
  3. Impact on credit use: Using a credit card to pay for rent might be a good strategy to accumulate points and build up credit, but there are also disadvantages. To determine whether or not this approach is suitable for your financial situation, it will help to be aware of the dangers and advantages.
  4. Restrictions of the landlord: The landlords do not accept all credit cards. Some will even insist on a particular form of payment that might have added charges.

Also Read | Worried about fraud? Here’s how to block credit cards permanently

In conclusion, the benefits of paying rent using a credit card, such as earning points and building credit, may be far outweighed by the costs: fees, interest, and the potential impact on credit scores. Consider your habits, risk appetite, and ability to pay off the amount in full before taking this route. Ultimately, the decision is personal and depends on your specific financial situation.

 

(Note: Using a credit card carries its own set of risks)

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First Published:9 Jan 2025, 12:00 PM IST
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