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Each month Lyman Yip's $1,585 rental payment for his San Mateo, CA rental home is deducted from his credit card account.
The rental payments ring up quite a few "points" Yip can later convert into cash to use on purchases.
"It's automatic, so I never pay late and don't have to remember to write a check every month," says Yip a controller for Liquid Audio, Inc. a Redwood City, CA-based digital media delivery software maker.
To his benefit, the credit-card savvy Yip is among a minority of credit card holders who pay off their credit card each month to avoid interest charges.
Using your credit card to pay the rent can be a financially sound, even financially rewarding practice, provided you have the discipline, like Yip, not to increase and carry the debt month after month.
Unfortunately, that's not true for the vast majority of credit card holders and they are using the most expensive form of credit most consumers carry.
"Paying rent with a credit card could attract two types of customers, those who are using rewards cards and like the idea of earning an airline ticket or another freebie for using their card to pay the rent (while they pay the balance in full) or consumers who are headed for trouble financially because they are charging their day-to-day living expenses. The difficulty is in telling the difference between the two," says Gerri Detweiler, co-author of Slash Your Debt, Save Money & Secure Your Future," " (Financial Literacy Center, $10.95).
One of the nation's largest apartment investment and managing companies, Denver-based Apartment Investment Management Co. (AIMCO) has 337,000 units in 46 states and it has been allowing tenants like Yip to pay their rent with their Visa cards over the past two years.
The company says 40 percent of tenants aware of the option choose to make payments with their credit cards and among those who use plastic to pay the rent, 30 percent of them use a no-interest debit card to deduct funds from a checking account and avoid accruing interest.
Englewood, CO-based apartment owner-developer Archstone-Smith has 225 garden-style and high-rise properties, representing a total of 79,982 units, and has also begun accepting credit-card rent payments.
Apparently, the practice isn't new.
"Savvy landlords in Las Vegas and Reno have been collecting rent via credit cards since the early 1980s...geared toward those who work in the casinos," says Thomas J. Lucier, Tampa, FL-based landlord and publisher of the landlord do-it-yourself Web site FloridaLandlord.com.
"I remember the howl that went up when grocery stores first started to accept credit cards and people started to buy booze and cigs on credit. This is the same old story," Lucier added.
What's the deal?
Landlords offer credit card rent payments because it helps them get a higher percentage of on-time rent payments. That boosts cash flow.
"As a property owner, I think it would be great to be able to debit my tenants' rent at the first of the month, instead of waiting for their checks to come dribbling in between the 1st and the 7th of the month. I think it would be a time saver for my tenants, they would not have to worry about getting the rent check written, finding our address, sending it out, and so on. They would simply know that their rent would be taken out at the first of the month," says Julie Ziemelis, who along with her husband Eric, owns a triplex in Sunnyvale, CA and rents out an extra unit at their Los Gatos, CA home.
The credit card rent-payment option is also a good marketing tool, says Terry Feinberg, executive vice president, of the Phoenix, AZ-based Arizona Multihousing Association.
"Owners can get a higher closing percentage on vacant units," Feinberg said.
The practice isn't widespread, however, largely because landlords must justify their cost to offer the service.
"Owners of large portfolios in the (San Francisco) Bay Area generally do not accept credit card payments for rent because of the 1.5 percent to 3 percent fees (per payment). It simply does not make financial sense," says Kathy Thibodeaux, chief executive officer of the San Jose, CA-based Tri-County Apartment Association.
"There is less interest in offering the option in tight rental markets where it is not needed as a competitive advantage," she added.
Some electronic rental payment services simply pass the service charges onto consumers and landlords certainly do the same with credit card services, but that's likely to encourage fewer renters to pay by credit card.
Paying by credit card is already a tough sell for many consumers who are aware of the potential costs of credit card debt.
"The interest alone will keep you in debt. I don't see how it could be good. It seems like a desperate situation. It's either something you'd have to do to compensate for poor money managing or its for someone who is without a job, but that is not how you use your credit card," said Mountain View, CA-renter Nakisa Badiri.
Unless consumers use debit cards or are disciplined enough to pay off their credit card balance each month, their rent could effectively skyrocket with the added cost of using expensive credit card credit to foot the housing bill.
The March edition of the Cambridge Consumer Credit Index by Cambridge Credit Counseling Corp., an Islandia, NY-based not-for-profit credit counseling and education operation, said only 37 percent of credit card holders were able to pay off their credit card, a typical percentage each month. For the remaining 63 percent, money is being sucked into a compound interest accruing sinkhole.
For example, if you carry the national average credit card debt of $7,000, and have a credit card that charges 18 percent, which requires a minimum monthly payment equal to 2.5 percent of the balance ( $175), it would take you 347 months (almost 29 years) to pay off your debt -- provided you paid only the minimum balance and didn't make additional charges. During that time, you'd pay $10,115.28 in interest -- in addition to the $7,000 principal, according to Bankrate.com's credit card calculator.
In some locales, quickly running up a $7,000 credit card debt in rental payments isn't out of the question, but even with a smaller $2,000 debt, a credit card can be expensive. With the same credit card, always paying the minimum required payment of $50.00 on a $2,000 initial balance would require 222 months (18.5 years) of payments to be rid of your debt. In that time, you will pay $2,615.43 in interest, plus the principal.
"Landlords want to get paid so this is 'good' for them. Tenants don't want to end up on the street if they can't make their rent payments so it's not all bad for them. If it's for convenience, better to use a VISA or MasterCard debit card which is connected to your checking account. It's also okay to do this on a credit card if you pay in full and get some benefit such as frequent flyer miles," said Eric Tyson, a financial counselor and author of "Personal Finance For Dummies," (Hungry Minds/John P. Wiley, $21.99).
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