Using Credit Cards To Pay Your Mortgage

I recently read a report on The Guardian, which said that more than a million householders have been using credit cards to pay their mortgage or rent. The data was gathered by a new survey published by ROOF, Shelter’s housing and homelessness magazine.

For many people trying to keep a roof over their head is becoming increasingly difficult, as salaries aren’t increasing at the same rate as living costs; desperation is driving them to short-term, high-cost borrowing. Credit cards are the easy and obvious solution for the desperados because they’re so easily attainable, even with bad credit history. Unfortunately, credit card debt is a major problem and is the source to a lot of social and personal debt.

While it’s an extremely dangerous way of paying for a mortgage, I know people aren’t going to stop using this method because of the ease of availability. I’m not going to support people using credit cards, but I will try to document better ways of using them for the casual user.

Annual Percentage Rate (APR)

The APR is referring to the interest you will pay on your credit. The average annual percentage rate is currently 15% on most credit cards. With such high interest rates, it’s no wonder people get themselves buried into debt.

How do people use a credit card to pay their mortgage?

Most people get what is called a “cash advance” or “cash withdrawals” to help pay their mortgage payments. That’s when a cardholder withdrawals cold cash from their card balance. It’s basically like taking out a loan (with a lot less hassle), but with a very high APR. Not only will you pay interest, but you will also need to pay a 2.5% (approx) handling fee to get the cash in the first place.

Examples of Loan rates

    Credit Card
    APR: 14.9 % APR (variable)
    Cash Withdrawals: 2.5% (Admin fee)
    Scenerio: Let’s assume you need £1000 to make a monthly mortgage payment. You’re already paying a £25 handling fee on that. If you plan on paying this back over a period of 1 year you’ll need to pay £90.21 per month.
    You’ll end up paying: £1082.52
    It doesn’t sound like much, does it? But if you look at the bigger picture, you’re already paying interest on your mortgage.
    Alternative to Credit Card
    If you can get approval for a loan, then GET A LOAN!!!! Loans are so much cheaper than credit cards. People opt for credit cards because they’re easy to get approval for. However, even someone with bad credit can get a loan with a lower APR than a credit card.
    Lender: Zopa
    APR: 6.4%APR Typical
    Term: 12months
    Total Repayment: £1037.59 (includes £5.00 admin fee)
    As shown, if you get a loan you’ll pay almost half of what you would be paying on interest with a credit card! That’s a massive difference.

Better ways of using your credit card

Solution 1:

A mortgage should be your number one financial concern. Your house is an extremely strong asset. Anyone with a mortgage should plan their monthly budgets around their mortgage payments and not vice versa. It should be your duty to put aside enough to pay your mortgage from your salary. It shouldn’t even be seen as an emergency fund once it’s put aside. If you find that you’re struggling after you’ve put your mortgage funds aside, that’s when you can start adding your extra living expenses on your credit cards. So, the first tip is to put all your living expenses onto your card that you can’t pay for, and pay for your mortgage with the money you do have- don’t do it the other way round. Of course, there are better ways than others to add expenses onto a credit card, as your about to find out…

Picking the right Credit Card

I just went into Google and searched for “Credit Cards”. I clicked on a site called fool. I get a result as so…

Credit Cards

There are 3 columns we should be focusing on here, “new purchase”, “typical APR” and “balance transfers”.

New Purchase: the rate you’ll pay when you purchase anything with your card
APR: the % rate you’ll pay once your 0% period has expired

Basically, you should be aiming to get a card that has a 0% balance transfer fee (excluding admin fee- you won’t be able to avoid that), 0% new purchases rate and an APR that complies with in the average range. So from that list, the MINT card looks reasonable because there is no interest rate on purchases until May 2008. That basically means that you won’t pay any interest on anything you buy until May 2008 as long as you make your minimum monthly payments.

Balance Transferring

Balance Transfer: the rate you’ll pay when you transfer an unpaid credit card balance from one issuer’s card to another issuer’s card.

Now this is the nice part. If your interest free period (known as the “grace” period) is coming to an end, and you still have an outstanding balance, you can open a new account with an alternative company that offers a free balance transfer (excluding the 2.5% admin fee) and a “new purchases” rate period of 0%. That means your debt will now be transferred to the new account and you still won’t to have to pay interest, until the period expires.

For a savvy consumer, this can be an excellent method of reducing credit card debt. It leaves the person free to pay down the balance on a credit card without incurring interest charges. Using this strategy, a person could potentially open a new account that offers a balance transfer when the old one expires. Then transfer all of the balance to the new card to begin a new grace period of low or non-existent finance charges. If you plan to do a balance transfer, be sure to close your old account immediately.

Making a balance transfer work for you is an excellent practice, but diligence is required. Sometimes there is fine print attached with hidden charges.

Solution 2:

I know a lot of people already use this solution because I’ve seen a lot of people talk about it on forums and such. This solution requires the assistance from good friends with cash to spend.
As mentioned, cash-advances require repayments with high APR’s and “new purchases” may have 0% repayment periods. So what people do is buy everything on their card for their friends and family, and in exchange get the cash from their friend(s)/family. That way they will qualify for the 0% repayment period. It’s a simple and affective way of getting cash at a 0% rate. I don’t endorse this method, but I know it’s heavily used and can be effective. Of course, to rack up £800 to make a mortgage payment, you will need friends that like spending their cash.

Extra notes

I’m not advising anyone to go with any particular card. It’s completely your decision. I’ve merely highlighted key practises that could help you save on interest rates.

Make sure if you’re transferring a balance your application for the new card isn’t going to a bank that just rebrand their cards for someone else, as if it is there’s a risk you’re applying to the same bank as your current card. For example, MBNA rebadge their cards for all kinds of people – Virgin, WWF, and of course themselves. The reason not to do this is the chances are very high they’ll reject you (as they’ll know what you’re up to, and you already have credit with them), which will then negatively affect your credit rating.

Barclaycard is the top of that list on the Fool site – and another great example of why it’s vital to read the small print. A while back they did a deal whereby you get a great 0% offer if you agree to spend a certain amount on the card each month. However, you need to check in your agreement which balance gets paid first. On the Barclaycard, your monthly payments are first used to reduce the transferred balance, *then* your purchases. So, if you transfer 10K and spend the required £50 a month (for example) onto this card, you’ll find yourself paying the usual 14% or so on that £50 (plus another £50 every month) until you’ve paid the whole of the £10K, or transferred it off again to another card.


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1 Comments- Join The Conversation...

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Victoria 30th October, 2007 @ 18:15

A cracking, well researched article with good detail. Top work :)


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