Using credit cards to pay loans, bills attracts interest

With more Americans struggling to pay for basic living expenses, a small but growing segment of the finance industry is encouraging consumers to pay their mortgages, car notes, student loans — and even alimony — online by credit card.

Those who pay their card charges in full each month may find that the practice provides a slew of card incentives while buying extra time to come up with the cash.

Paying recurring monthly bills with plastic however, could drive the debt-ravaged consumers who may be tempted by the option deeper into debt and push the sub-prime loan crisis onto the credit card industry.

"Given the current economic situation, we'd advise anybody who really depends on occasional credit to avoid this service, because it's an accident waiting to happen," said Travis Plunkett, the legislative director of the Consumer Federation of America.

Using a credit card — which is essentially borrowed money — to repay borrowed money violates a basic tenet of financial well-being: Never borrow from Peter to pay Paul.

Over the last year, however, the credit card industry and a small group of entrepreneurs have been working to punch holes in that widely held wisdom.

For a fee of $4.95 per transaction and 2.3 percent of the bill amount, ChargeSmart, a new online bill-payment company headquartered in San Francisco, allows consumers to pay mortgages, auto loans and leases, student loans and utility payments by credit card.

ChargeSmart isn't targeting distressed borrowers, Chief Operating Officer Philip Mikal said. Of the 1,000-plus transactions that have been processed since the company launched in July, only 1 or 2 percent involved delinquent accounts, Mikal said. Some lenders, he said, are refusing payments without first talking to customers whose accounts are many months behind.

Mikal said the bulk of ChargeSmart customers were savvy spenders who were looking to maximize their card-reward programs. Some use zero-interest-rate cards; some are salespeople or small-business owners with irregular incomes, who see ChargeSmart.com as a way to manage their cash flow better, Mikal said.

ChargeSmart's main competitor, BillCharger of New York, offered similar online services but also provided card payments for insurance premiums, rent, alimony, property taxes and other bills that traditionally don't accept plastic.

After launching in April as the "only service of its kind," BillCharger quietly suspended operations earlier this month "while we work on tweaking the business model," company founder Andrew Fisher said.

BillCharger's rocky start "is indicative of the challenges faced in bringing a new payment service to market," Mikal said.

He should know. Last year, Mikal co-founded CardIt, another start-up that permitted mortgage payments by credit card. CardIt folded three months after its September debut because of funding problems.

American Express, which OKd card payments of luxury rentals in 2003 and luxury condominium down payments in 2006, was the first card issuer to embrace mortgage payments when its Express Rewards Mortgage program began in May 2007.

Qualified cardholders paid $395 one-time fees for the chance to charge monthly mortgage payments, which could earn card incentives such as membership rewards, cash back and airline and hotel points.

Unfortunately, the first lenders to offer the option were American Home Mortgage and IndyMac Bank, both of which became casualties of the sub-prime mortgage crisis.

American Express is working to "carefully evaluate the future of the Express Rewards Mortgage program and determine next steps," said Sarah Beron, a company spokeswoman.

These setbacks may have slowed the expansion of credit card payments into nontraditional areas, but experts say they won't stop the migration.

Earlier this year, MasterCard lowered its merchant rate structure for the insurance, rental and utilities fields after noting increased consumer and business demand for card acceptance.

"We're very pleased with the merchant reaction. We're bringing on new acceptors all the time," said Stephen Carnevale, the vice president of U.S. commerce development at MasterCard Worldwide.

With the U.S. credit-card market relatively mature, card issuers that are looking for growth areas have targeted bill payment as one of the least explored, said Ed Kountz, a senior analyst at Jupiter Research.

A Jupiter survey last year found that among consumers who regularly pay monthly bills online, 31 percent preferred one-time direct transfers from a bank account compared with 12 percent who preferred using credit cards. The top reason for using credit cards was to earn card rewards and avoid late fees, Kountz said.

On its Web site, ChargeSmart.com uses a creative math calculation involving a fictitious customer named "Greg" to show the potential benefits of using the card payment service.

It estimates that after making a $6,574 mortgage payment on ChargeSmart for a charge of $152.87, "Greg" will "see a monthly gain of $21.39" after estimating the monetary value of airline reward miles and of delaying his cash payment.

After reviewing the calculation, Ken McEldowney, the executive director of Consumer Action, a San Francisco-based watchdog agency, said the calculation was confusing and overstated the value of the airline miles and the benefits of the transaction.

"I'm having a lot of trouble with the math," McEldowney said. "Unless I'm missing something, the only type of consumer that would see any worth in this is someone who is totally strapped and desperate and willing to pay a really high fee to charge a mortgage payment or utility bills as sort of a last-gasp effort."

Mikal said, however, "That is not the kind of customer that we're targeting."