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How to Pay Off Your Student Loans With Low-Interest Credit Cards

By Joshua Caucutt

student loan can be overwhelmingIn November 2011, CNN reported that students who graduated from college in the past year did so with a record level of student loan debt – $25,250 per graduate.

What is most worrisome is that this number is an average – meaning that while some students’ debt stayed below this amount, many carry debt far in excess of $25,000 – some up to or even exceeding $100,000 in student loans. What’s worse is that many former students with significant student loan debt never even received their diploma.

There is no easy way to pay down student loans, despite the ease with which this debt can accrue. However, there is a strategy for attacking school loans that you may not have considered and can make things a little easier: low-interest credit card balance transfers.

Introductory APR balance transfer comes with risk, but if you keep good records, pay your bills on time, and have a good credit score, you might be able to pay down your student loans a great deal faster using credit cards. However, there are a number of variables to consider before determining if this is the right method for you.

Low-Interest Credit Cards to Eliminate Student Loan Debt

1. Are You a Good Candidate for Low-interest Balance Transfers?

If you have a solid credit score, you may very well be a good candidate for low-interest balance transfers. To keep your credit score as high as possible, regularly access your free credit report and check it for inaccuracies. Also, establish lines of credit as soon as possible, but be careful that you only charge minimal amounts each month, and pay them off in full every billing cycle. The longer that you have used credit responsibly, the better your score.

Practicing good fiscal habits over a long period of time is the single best way to improve your credit score. Good financial habits include paying bills on time, never going over 50% of your credit limit, and keeping your spending modest.

low interest credit cards can be used to pay down student loan debt

2. Which Loans Should You Transfer to a Credit Card?

Transferring loans is not necessarily as simple as it sounds. Though a lower interest rate is what you’re ultimately going for, make sure you don’t give up valuable perks by transferring certain student loans.

Prioritize Loans With Higher Interest Rates
When you choose which loans to transfer to a credit card, do not automatically pick the loans with the largest balances. The strategy works best when you target smaller loans that are subject to higher rates of interest. By using this strategy, you can accelerate your payoff because more of your money will go toward principle and less toward interest.

Avoid Transferring Government Loans
Generally, you do not want to use low-interest credit card balance transfers for government-subsidized student loans. Instead, save the balance transfer strategy for loans originating from private banks.

Government loans come with all kinds of built-in ways to suspend, adjust, defer, or otherwise reduce payments. These are nice tricks to have at your disposal if needed. Once you transfer a government loan to a low-APR credit card, you lose those benefits. The ability to accelerate loan payoff by reducing interest might be increased, but your risk also increases.

3. How Much Should You Transfer?

Whatever you do, don’t transfer more than you can pay off within the low-APR introductory period. It is in your best interest to start small.

You will likely not receive enough offers to facilitate transferring the entire balance of student loan debt to credit cards with low-interest rates at once – especially if you just graduated from college. Instead, pick a smaller high-interest loan to target first. Then concentrate all of your energy toward paying down that loan before the introductory rate expires.

There are three reasons to utilize this method:

  1. This is the best way to make the most progress on any one loan.
  2. You will benefit from practice and experience before biting off a bigger chunk the next time you transfer a balance.
  3. It will provide time for your credit score to increase.

Remember, if you can responsibly use a balance transfer by paying on time, your credit score will increase and you will have even more low-interest offers with bigger credit limits in the future.

4. How Do You Evaluate a Good Transfer Offer?

A lower interest rate does not automatically mean that a balance transfer offer is “good.” You must also consider the impact of balance transfer fees and the length of the introductory APR. Remember, you need to plan on paying off the entire transferred loan balance within the introductory period; otherwise the interest rate on your loan could skyrocket beyond what you were paying before the transfer.

Interest and Term
How do you evaluate what is “low interest”? Clearly, the lower the better, right? That is true; however, you also need to factor in the length of the term.

For instance, a balance transfer offer of 2% APR for 12 months might be better than a 6-month, 0% APR offer. I recently saw an offer to lock in a balance transfer at 3% APR for five years. This could be a really good deal for someone who is paying student loans at 8% or 9% interest.

Low interest can mean any rate that is lower than your current rate. However, I do not recommend this strategy unless you are lowering your rate by at least four points. Remember, if you cannot pay off or transfer your entire balance at the end of the introductory period, then this strategy will not help you at all. It might be better to keep your loans right where they are.

Fees
Always remember to examine the fees. Nearly all balance transfer offers are accompanied by a fee based on a percentage of the loan, which needs to be figured into the cost of the loan.

Treat the fee as if it were interest on the first 12 months of the balance transfer. For instance, a 12-month 0% APR transfer with a 3% fee means that, essentially, you will be paying a 3% APR – a pretty good deal in most cases. However, this is why I do not recommend 6-month balance transfers, because the fees on a 6-month transfer are usually the same as the fees on a 12-month balance transfer. A 3% fee on a 6-month balance transfer means that you are actually paying an annual percentage rate of 6%, and that rate is probably not worth the hassle.

would using a credit card balance transfer work for you?

5. Do Low-APR Balance Transfers Come With Risk?

Low-APR balance transfers do indeed come with risk. It is extremely important to remember that while there are balance transfer offers which allow you to lock in a low-interest rate for the life of the loan, in most cases you are dealing with temporary rates. These are rates that expire after a short period of time.

Be sure that you make plans to pay off the balance of the loan (or transfer it to another card) by the time the introductory APR expires. If you leave a balance on the card at the end of the rate period, you will trigger a much higher interest rate that could drive you deeper into debt and worsen your situation.

Low-interest balance transfer offers come and go, so there is no guarantee that a new offer will be available to you at the end of the introductory period. Because of these risks, the strategy of using low-interest balance transfer offers to pay down school loans should be undertaken with care and caution.

Final Word

I have personally used this strategy to manage large debts, and I know others who have paid down large credit balances by using introductory balance transfer offers. Yet it is not always an easy plan to execute. Using introductory balance transfers to pay down school loans requires active participation on your part, good record keeping skills, and punctual payments. If you have higher-interest school loans and the skills to manage your money well, balance transfers could be one more weapon in your debt-reduction arsenal.

Have you used low-interest credit card balance transfers to manage student loan debt, or to pay down other large credit balances?

(photo credit: Shutterstock)

Joshua Caucutt
Joshua Caucutt has a BS in Mathematics and a Master's degree in Nouthetic Counseling. He has published or written for several blogs and websites over the past decade. He is a long-term market follower, financial educator and especially interested in looking at money from a biblical point of view. Formerly known as "Stew" at Gather Little by Little, Josh writes under his own name at Money Crashers.

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Comments

  • http://www.budgetforwealth.com Long Pham

    This is a great strategy. However, it might be tough for most people follow unless they are quite disciplined and have good money management skills as you already mentioned.

    I also want to make it a point that people check the the current interest rate of their loans. I know for my wife’s private loan, the interest is variable and has been at a lower interest rate than the government loans for quite some time now. For our situation, it wouldn’t be prudent to pay the balance transfer fee. Every situation is different.

    Timing is also an issue. Opening a few credit cards to utilize the balance transfers will create a lot of “hard pulls” on a consumer’s credit report. Some advanced planning should overcome any issues a potential hit to your credit score can cause. Just something to think about. Thanks.

  • FatMoneyPig

    Absolutely right. Most people lack that discipline that is vital for pay off their debt. Good post.

  • http://www.thedebtprincess.com/ Jessica

    agreed, It’s a good idea…IF you can be disciplined enough.. I can not and would never be able to.

  • Mukwonago53149

    In theory, you COULD transfer government loans to a credit card and then declare bankruptcy and have them washed away whereas if you kept them as government loans you could not.

    • Joshua Caucutt

      Ha!

  • http://www.nextpay.com/prepaid_debitcard_solutions.php Mastercard Pre-Paid

    Someone with too much debt would most likely not have the discipline to do this strategy except if he has turned his wheel and learned his lessons. If this is not handled properly, it may mean more problem.

    What works for me now is the snowball debt plan by Dave Ramsey. There’s nothing special with this strategy except the fact that this provides a sense motivation. This is what suits me because I’m not that disciplined.

    Best regards,
    Belinda

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