Money Girl explains whether transferring student loan debt to credit cards is a smart move for your personal finances.
A podcast listener named Sandy asks:
"I have $52,000 in student loans that charge 6.8% interest. Is there any drawback to transferring some amount of my debt to no-interest credit cards if I pay them off before the interest rate goes up?"
No matter if you need to pay off debt for school, a car, or a trip around the world, you may have wondered whether using a zero-interest credit card could help you save money.
In this episode we'll cover everything you need to know about transferring student loan debt to credit cards and if it's a smart move for your personal finances..
What Is a No-Interest Credit Card?
One of the easiest ways to save money on debt is to reduce the interest rate that you have to pay. That’s where a no-interest credit card, also called a balance transfer card, can really come in handy.
These zero-interest offers allow you to move debt, in an amount up to your credit limit, to a new or existing credit card account. You can make the transfer online or using a paper check. They charge no interest during a promotional period, which generally lasts from 6 to 24 months.
But after the promotion ends, your interest rate will go up, depending on factors like your credit score and the going interest rate. Additionally, being late on a monthly payment could also cause your rate to skyrocket.
So, the key to using no-interest cards successfully is to pay them off in full before the promotion expires. If you don’t, you could end up paying an interest rate that’s much higher than if you hadn’t done the transfer in the first place.
Also, you’re typically charged a fee that ranges from 3% to 5% of the amount you transfer that gets added to your balance. Therefore, if you’re not completely sure that you could pay off the entire balance in time, doing a balance transfer is not a wise financial move.
How a No-Interest Credit Card Saves You Money
To know if a no-interest credit card could save you money, you’ve got to do the math. Compare the fees you’d pay if you did a balance transfer against the interest you’d have to pay if you didn’t.
Microsoft Office has a free amortization template for Excel that you can download. You simply add your loan information and see how much interest is left to pay. Or you can use the Credit Card Optimizer Calculator at dinkytown.com if you’re looking to transfer just credit card debt.
If a zero-interest transfer makes sense, a smart way to manage it is to divide the balance by the number of months in the promotion. For instance, let’s say you transfer $4,000 from a high interest car loan and also have a 3% transfer fee tacked on.
Your new balance would be $4,120 (($4,000 x 3%) + $4,000). Dividing that amount by 24 months shows that you’ll have it paid off by the end of the promotional term and won’t have to pay a penny of interest, if you pay $172 per month.