Today I received an email from American Express that advertised a program where you can earn rewards by paying your Indymac mortgages with an American Express credit card. I do not have a mortgage, but I read this email and wondered, why would anyone pay their mortgages with a credit card?
There are many reasons why paying mortgages with a credit card is a bad idea. First of all, the interest rates credit cards charge are typically very high. For example, the lowest rate I have on a credit card is 10.99% and the highest is 24.99%. So if you get behind on paying your credit card you would be paying interest on mortgage interest, and that is a double whammy of debt.
Second, mortgage payments are usually pretty big so if you do not have a very large credit line then the high balances you carry due to mortgage payments could lower your credit score.
Third, putting your mortgage on a credit card could give you a false sense of cash flow. I guess this is a danger in buying anything on credit, but by putting a large mortgage payment on credit you may feel extra rich and that could lead to more spending and debt.
Finally, there are often costs associated with paying your mortgage with a credit card. Most people who are charging mortgages are using the cash advance feature of the cards, and that carries very high transaction costs. I have seen others that charge 2.9% of the mortgage or a flat fee.
The only advantage I see in using a credit card to pay for a mortgage is if the rewards outweigh the costs. As with all reward cards, as long as you pay off the balance and do not incur any interest charges you do get a little money back. In the case of the American Express mortgage payment program, it takes $395 to set up the program and you get 1% back in rewards. So after charging $39500 of mortgage payments, you will start to earn cash back. This would only be advantageous to people with big mortgage payments and the money to pay back the credit card every month.
I think it is alarming to see that many homeowners in trouble are keeping themselves away from foreclosure by charging their mortgages because once their card limits are reached they will lose the property anyway, and they may be paying interest on those mortgage payments to the credit card companies for many years to come. It is understandable that these homeowners want to keep their homes, but credit cards are not the solution to their problems. As always, if you cannot afford the full amount on your credit card bill, then it is best not to charge it.
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