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blog (coffee shop)
by I have a few thousand dollars left of student loans, and I was hit with an idea recently to avoid paying further interest. (The interest rate is very low, but 0% is lower.) It goes like this:
- Open a credit card account with a 0% APR introductory offer for balance transfers.
- Pay off my student loan with an existing credit card.
- Transfer the balance from my existing credit card to the new card.
- Enjoy paying off the loan interest free.
There are some potential downsides, of course:
- Opening a new credit card can be dangerous if you aren't frugal.
- Applying for a credit card results in a credit check, which can negatively affect your credit score.
- There may be something in the fine print of the new card that causes the introductory rate to expire.
And yet, there are mitigations:
- I'm very frugal.
- I'm not concerned with the effect of a single, isolated inquiry on my credit score.
- I plan on reading the fine print, asking a lot of questions, and being completely transparent with my student loan provider and both credit card companies. (I also plan to document the process and my contact with all parties.)
See any holes?
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1 Nerd-It
we did that...
we bounced a few balances from one card to another in order to not pay interest for a couple years. Our credit score was good enough last december to get the lowest possible interest on a used vehicle. We eventually got a bank loan with a very low fixed intrerest to pay of the credit card balance.
0 Nerd-Its
Sallie Mae
I hope you didn't have a Sallie Mae loan.
This comment has 1 reply.
1 Nerd-It
Should be O.K. But..
You are safe with your plan except for the following:
1. As the anonymous poster noted, if you are even 1 day late with a minimum payment, the introductory rate of 0% changes to whatever their standard rate is. (Read that print.)
If you goof up once, and aren't too late (a few days minimum) a humble apologetic phone call might get you out of it. (I did this and was lucky.) They do keep track, so you probably will only get one 'mulligan'.
2. Do not confuse things and make any other purchases with this card while paying off the loan. The introductory rate usually only applies to the initial balance transfer, and payments toward future purchases will have to be completely covered every month or you will pay interest on those.
I don't think it's a trap if you are diligent in keeping track of what you are doing. The credit card companies are betting that many people won't, and that's what makes "0%" profitable for them.
Can you pay a student loan with a credit card?
1 Nerd-It
taxes
Don't forget to figure in that student loan interest is usually tax deductible where credit card interest (if you were paying any) is not. Most of the time no interest will beat the potential saved taxes but some cases not (my first couple years out of school I had high balances and relatively low income - the deduction helped actually drop me a tax bracket).
1 Nerd-It
Comments in emails
It seems O-Nerd had a little glitch when I spammed my friends and family with this post, so many of them sent replies via email (instead of posting comments here). Here are some of them, along with my thoughts:
A lot of those 0% APR balance transfer offers have a 3% balance transfer fee. Make sure you read the fine print.
Yes, any transfer fee stands a good chance of making the move uneconomical. I'll have to watch for that.
It's worth a try but my guess is your student loan company won't let you pay with a credit card. The credit card companies take a little slice like 1 or 2% off the top from the payment face value. Customer friendly places like stores put up with this because they want it to be convenient for you to shop there. But I would be surprised if your loan company will be willing to be paid back the loan principal at a
discount.
I would like to pay my property taxes with my credit card to get bonus points, but the county entities require you to tack on a premium for this reason, so that you eat the credit card payment fee instead of them. Maybe if the loan company balks the interest savings might make it worthwhile for you to offer to repay the loan balance at a small premium.
And then a similar comment from someone else:
Have you checked to see if you have to pay a fee if you pay off your student debt by credit cards? A lot of places will charge you what they get charged by the credit card company. For example, I would pay my taxes by credit card except for the fact that the IRS will charge me approximately 3% to do it.
When I say "pay off the student loan with a credit card," there are actually quite a few ways to do it. You can use one of the checks your existing credit cards send you, and then transfer the balance. Or, you could get the card offering the 0% APR to just send you a check (rather than actually transferring a balance from a credit card). Surprisingly, many of them are willing to do this. You could then just deposit the money in your checking account and pay off the student loan.
Most of the 0% balance transfer cards i've encountered (and had) have a 3% transfer fee tacked onto the transfer amount AND the 0% only lasts for up to 12 months. So the 3% vs. 6% tax assisted student loan isn't that much.
After a year or if you make a mistake the rate will probably go up to ~16% to 20% on any remaining balance. You could then get an additional 0% balance transfer card and do the dance all over again.
Also the credit limit might not cover your loans. (highest I got was a 5K bank of america card)
I did the credit card waltz for a while but only with confidence that I could get a decent job soon after.
All good points - particularly the time limit. I did some looking around and it appears most of them expire after 12-15 months. So, unless I want to transfer the balance multiple times, this would only make sense when I'm 12-15 months away from paying off the loan.
First, check if there is any fee for doing balance transfer. Sometimes, it could be as high as 5% of the amount.
Second, credit score will be affected, but only if the (total) debt to (total) credit ratio is above 25% (mine changed from 775 to 723 in 6 months, for a 33% ratio), and then jumped back to above 750 when I made the ratio below 25%.
I'm sure you have looked at other small little things, like: the duration for which 0% APR will work, your existing credit card and the new 0% APR card are not from the same company, how much the APR will shoot to if you forget one payment, etc.
Good call on the credit score effect. As I'm just moving debt from one place to another, I don't think it will affect me, though.
To sum it all up, it appears this idea only makes sense if I can find an appropriate credit card (i.e., without a significant transfer fee, with a high enough limit, etc.) and then be willing to do the same every 12-15 months until the debt is paid off.
I'll drop a note here if anything like that ever turns up.
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It's a trap! by Anonymous :: NR0 :: Show
One missed payment, even by a day, and your credit won't change but the 0% will change to 20%.
Some cases the 0% will expire read and read again.
Any other purchases on the card will need to be paid off first.