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Paying your rent on a credit card can hurt your credit score—here's the only time you should really do it

It may seem convenient to charge your monthly rent on a credit card and earn rewards back — but it can damage your credit score. Financial expert John Ulzheimer explains.

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The ease of charging your monthly rent to a credit card without having to mail in a check is extremely appealing. And if you are a tenant who uses direct deposit to submit your monthly payment, you may have thought about how you could accelerate your cash back, points or miles by using your credit card instead.

Paying with plastic may seem like a convenient alternative — but while there are ways to do it, it's not for everyone. Similar to charging a big expense like college tuition on a credit card, there is most likely a processing fee associated with it that offsets any rewards you may earn.

"If you have no other way to keep a roof over your head, then using a card could buy you a few months to get back on your feet financially," financial expert John Ulzheimer, formerly of FICO and Equifax, tells CNBC Select. But ultimately, "using a card to pay rent or a mortgage, to the extent your lender or landlord allows you to do so, has pros and cons." It should only be done when you're nearly certain the benefits will work in your favor.

Below, CNBC Select breaks down what to think about before paying your rent on a credit card — and the only time you really should do it.

Charging your rent usually means paying extra fees

The best case scenario would be if your landlord or property management company accepts credit cards without a fee attached to each transaction, but this is very rare; if they do accept credit, you'll most likely have to cover the cost of the transaction fee.

If your landlord doesn't accept credit cards, your second option would be to use an online bill payment service, but these are costly. Plastiq, a popular choice for renters, applies a flat 2.5% fee to every payment and PayPal Checkout charges a 2.9% processing fee, plus $.30 per transaction.

Do the rewards you earn surpass the cost of the extra fees?

Processing fees for charging your rent on a credit card are usually between 2.5% to 2.9%, which means if your monthly rent is $1,471 (the 2019 national average) and you are charged a 2.5% processing fee, you would pay an additional $36.78 every time you use your card to pay rent; that's an additional $441.36 for swiping over the entire year. Any rewards you may have earned through your credit card may at that point be negated, especially if your credit card came with an annual fee.

The only time you should pay your rent on a credit card

"To the extent you are using a card and earning rewards, if you can pay your balance in full each month then at least you're getting some tangible benefit of paying with plastic," Ulzheimer says.

In other words, you should only pay your rent with a credit card if both of the following conditions are true:

  1. You're certain that the value of your rewards exceeds what you pay in processing fees; and
  2. Your monthly budget includes paying your balance in full before your grace period ends

Since processing fees are so standard for most payment portals, the one time you're most likely to earn more in rewards than you pay in fees is if you use a credit card with a good sign-up bonus.

One example is with the Chase Sapphire Preferred® Card, which offers new cardmembers 60,000 bonus points if they spend $4,000 in the first three months (worth up to $750 toward travel when you redeem through Chase Ultimate Rewards®).

Since most bonus offers require sizable spending upfront, charging a hefty rent bill can help you reach that large spending requirement in a timely way. But don't make it a habit once the 3-month mark is over.

"The downside is that you'll essentially be making a major purchase on your card every month," Ulzheimer says. "If you fall into the habit of just making the minimum payment your card will likely max out fairly quickly."

The cost to your credit score

"Credit scoring models will punish you as well if your balance eats up too much of your credit limit," Ulzheimer says.

This means there could be a spike in your credit utilization rate, which is the ratio of how much credit you've used to how much is available — a very important factor lenders use when determining your credit score. While experts recommend keeping your utilization rate below 30%, it's worth noting that a monthly rent payment could easily exceed this 30% maximum depending on what your total credit limit is.

Consider a scenario where your monthly rent costs $1,000 and the credit card you are using to pay for it has a limit of $5,000; that's already using 20% of your credit just covering rent. Other everyday expenses you charge on the card will easily add up over the month to 30% or higher.

For this reason, it may be worth it to first ask your lender for a credit limit increase before charging rent onto your card.

Bottom line

Even though credit cards can offer convenience when paying your monthly rent, there's really only one time you should use them for this purpose. If you want to meet a minimum spend on a new credit card and plan to pay off the balance in full right away so you aren't charged interest, it could be a rewarding route. Otherwise, it's hard to earn more in rewards than you spend on the high processing fees with each monthly payment.

The exception to this would be if you are in a pinch one month and need to use a credit card as an emergency backup. Even then, you would need to make sure you can pay off your balance in full during your next billing cycle so it doesn't backfire and this debt doesn't linger, racking up interest fees. And if you already can't afford to pay your credit card balance in full every month, it's probably not a smart idea to start charging rent on top of it as well.

"Ultimately, paying your rent or mortgage the traditional way, from bank account funds, is still the safest option," Ulzheimer says.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.