The right -- and wrong-- times to pay bills with credit cards

By Michael Lloyd

Using a credit card to pay bills can be a tricky endeavour. On one hand, if you do it responsibly, it can be a great way to earn points, or to simply keep all your spending in one place to easily track payments and locate discrepancies. On the other hand, if you're using plastic in place of actual income, it can lead to trouble, fast.

Paying bills with your card can have a couple of advantages, as long as you can afford to pay off the balance each month.

For instance, paying a few hundred pounds' worth of bills each month on a rewards or cashback card earns you more points than if you're only using the card for small purchases. It can also help you meet the spending requirement for promotional offers that pay you a large sum of points in return for a certain amount of purchases in a short period. bills-on-plastic

Additionally, some people like to pay bills with their credit card to consolidate payments. Tracking spending is easier when all, or most, of your expenses are coming from one place. Everything is in one statement so you can see what you've paid and spot inconsistencies more easily.

However, be aware that, even if you do pay the bill on time, your credit utilisation ratio (the amount you owe versus the amount of credit available) will still reflect your heavy spending. Credit utilization accounts for 30% of your overall credit score. Depending on how much of your available credit you regularly use, you could do some damage to your score. Most experts recommend staying below 30% of your available credit -- the lower, the better.

According to James Jones, head of consumer affairs at Experian, your utilisation ratio expresses your use of, and therefore reliance on, the account. So if you spend £1,000 in a typical month on a £2,000-limit card, chances are your utilisation factor is going to be 50%, even if you pay it off each month. In fact, Jones says, the utilisation ratio of someone who carries over that £1,000 and someone who pays it off will be the same (though you'll save money on interest charges if you pay it off). However, if you typically spend £1,000 a month on a £3,500-limit card, you'd still be below the 30% threshold.

When it's not a good idea
No matter what your reason for putting your bills on plastic, the key is paying the balance in full. Don't put your bills on credit and then use the money in your account for other purchases, or rely on the card because you don't have the funds otherwise. If you do, you'll find you're on a fast track to high interest charges and insurmountable debt.

It doesn't take long for your debts to catch up with you when taking this approach, PayPlan Money Advisor Jane Clack said in an emailed response to questions.

First, you'll be paying interest, which can add up quickly. Soon, your minimum payment is sky-high, and more than half of it is just the interest payment. As your minimum payment climbs and you spend more of your disposable income to pay the new, higher credit card bill, you may be tempted to start using a second credit card.

"We often hear from people who 'have robbed Peter to pay Paul'," Clack said. "People often don't realise they are actually using credit to pay credit, as they pay their credit card bill and then have to re-use the card again for household expenses."

This leads to a second problem: you run out of credit. Your card will eventually max out, and you won't be eligible for another card or a balance transfer. Suddenly, you're left with even more bills, and no way to pay them all.

"It is not until a credit card reaches its maximum that people realise things have to change," Clack said. "By this time they are also paying over-the-limit charges and just trying to make the minimum payments." You'll eventually be hit with late or missed payment fees, too.

Take, for instance, the case of Cambridge PayPlan client Vicky, who asked that her surname not be used for privacy reasons. She took this route and soon found her debts spiralling. Vicky is an accounts administrator and her husband was unemployed (she eventually divorced him), so times were already tight. When she moved in with a new partner, he lost his job as well. She started relying on credit cards to pay her household bills and put food on the table.

"I was like a little duck: calm on the surface but paddling madly beneath," Vicky says. "I always managed to make my credit card payments, so there was no trigger that told the banks I was in trouble." But eventually, she became complacent and simply accepted that debt was her way of life. Her frame of mind was, "What was another £10 on top of all the other debt?"

However, after talking to another friend in a similar situation, Vicky realised what she was doing and that she couldn't continue her habits, so she sought out PayPlan.

It is possible to get back on track, but it takes diligence and discipline. Budgeting doesn't come easy to most, Clack said. It's not a bad or shameful idea to take up credit counselling or debt charity services.

Vicky had to use a debt charity to realise how deep a hole she had dug:  £32,000, most of which was credit card debt. She just started her 6-year plan three months ago, but she's managed to change her habits and knows that relying on her card in place of income is not a path she wants to take again.

"Looking back, I didn't realise just how stressed I was," Vicky says. "I now think a lot more about what I'm spending, and I check my bank balance each day to see what's going out.  I know if I buy anything, I've got the cash to cover it and it's not on credit ...  I'm never going to get in that position again."

See related: What is APR and how is it calculated?

Updated: 16 May 2017