Should You Use Credit Cards to Pay Off Student Loans?
Many people are carrying student loan debt these days, and for many, it is a stressful experience. Student loans can have huge balances and can take as long as 20 years to pay off.
One way to reduce the cost of student loans is to use a balance transfer credit card to reduce the amount of interest you pay. This can save you a lot of money, especially if you have a high balance, but does involve some risks that you must be aware of.
How A Balance Transfer Credit Card Works
Balance transfer credit cards are cards that tend to offer introductory bonuses surrounding balance transfers. You can transfer a balance to nearly any card, but the way to save money is by transferring it to a balance transfer card.
Note: A balance transfer is different from a cash advance.
When you sign up for a balance transfer card, you’ll receive an offer to transfer an existing balance to the card, and pay no interest for a certain period of time. Usually, the promotional period is 12 to 24 months. During the promotional period, you’ll be billed and required to make payments as usual, but interest will not accrue on your balance.
You can transfer some or all of your student loan balance to your new card by contacting your card issuer. Not every card issuer allows you to transfer student loan balances, so call before applying for the card to make sure it’s possible.
When you transfer a loan balance to a credit card, you’ll pay a transfer fee. Usually, the fee will be between 2-5% of the balance transferred. Despite this fee, you can save money by avoiding interest charges.
- Potential to save a lot of money on interest
- Credit card debt can be discharged during bankruptcy, student debt cannot. Don’t transfer your balance with the intent to go bankrupt and avoid paying. You could get in trouble for fraud.
- Once you finish paying the balance, you can take advantage of the card’s benefits.
- If you don’t transfer the full balance, you’re now responsible for two monthly minimum payments
- If you don’t pay the balance off before the promotion ends, you’ll pay a high interest rate
- Taking on a new card and immediately place a large balance on it, your credit could take a hit
Dangers of Paying a Student Loan with a Credit Card
There are a few dangers involved in transferring a student loan balance to your credit card.
The biggest is that credit cards usually charge a much higher interest rate than student loans do. If you don’t pay off the transferred balance before the card’s promotional period ends, you’ll wind up paying more interest on the balance. Just a few months of credit card interest charges could eat up all of the savings you got from the 0% interest period.
Another danger is that you might not be able to transfer your whole student loan balance to the credit card. It all depends on the credit limit you receive. If you don’t transfer the full balance, you’ll now have two separate loans to handle. You’ve effectively done the opposite of consolidating your loan.
Two separate loans mean two bills to pay and two minimum payments to handle. If you wind up in a situation where money is tight, you might have trouble making both payments.
Third, applying for a new credit card will reduce your credit score by reducing your average age of accounts. Immediately loading it up with a large balance will further hurt your score. If you want to apply for a large loan like a mortgage, this can cause you some trouble or increase the cost of the loan.
Before turning to balance transfer credit cards, we advise to look into student loan deferment options. Often, you can qualify for deferment of payments or interest or reduced payments based on your employment or income. If you can qualify for some loan assistance, you lose out on that opportunity by transferring your balance.
When it Makes Sense to Use a Credit Card to Pay Off a Student Loan
If you want to transfer your student loan balance to a credit card, there are a few things to check before pulling the trigger.
- Make sure you’ll actually save money. Do the math to find out the size of the transfer fee you’ll be charged. Then do the math to find out how much interest you’ll avoid by transferring the balance. Make sure the interest savings exceed the transfer fees.
- Figure out how much you should transfer to the credit card. You have to be completely certain that you’ll pay off the full balance before the promotional period ends. I’d recommend planning to pay it off one or two months early just to account for unexpected situations that force you to pay less than expected during a portion of the promotional period.
If you’re not planning to transfer the full balance, remember that you’ll still have to pay the minimum on your student loan, on top of paying off the credit card balance. That could affect how much of your student loan balance you should transfer.
Generally, it is a good idea to transfer your balance to a credit card when you have a low overall loan balance and a lot of space to spare in your monthly budget. That gives you the highest chance of coming out ahead.
What to Look for in a Balance Transfer Credit Card
There are lots of balance transfer cards out there. If you want to look for alternatives to our suggestions, here are the features you should look for.
Look for cards that have the lowest introductory interest rate. You can easily find cards that charge no interest during the promotional period, so look for 0% APR interest cards. Watch out for what these APRs apply to -- it could be for purchases only, not balance transfers.
Look for the longest promotional period as that gives you the biggest benefit. Some cards offer promotional periods as long as 18 or 20 months. Again, introductory periods may vary on purchases and balance transfers and some card will offer different introductory terms for different types of card transactions.
Balance transfer fees
Look for the lowest fees to transfer a balance, as the fees eat into your overall savings. Card issuers may only waive -- or reduce -- balance transfer fees during a specific time window (e.g., the first 60 days after account opening), so you must make sure that you'll take out that balance transfer within the optimal time period. Otherwise, you could face a fee.
Use beyond balance transfers
Will you use the card after the balance transfer, or is the balance transfer its only purpose? A card that pays exceptional rewards or has other benefits for future use has a leg up on the competition.
After you finish paying off your balance, it’s a good idea to keep your new credit card, so long as it doesn’t charge an annual fee. Opening and closing cards too often can have an impact on your credit while leaving accounts open can improve your score. Combining a new account with a lower overall amount of debt can have a huge positive impact on your credit score.
Balance Transfer Cards to Consider
If you’ve decided to transfer some or all of your student loan balance to a credit card, consider these cards.
If you know what you’re doing, you can save a lot of money by transferring student loan balances to a credit card. Make sure to weigh the benefits and the risks and take steps to reduce the chances that you’ll wind up with a large credit card balance. If you do, you can accelerate yourself on the path towards freedom from student debt.
The optimal time to use a balance transfer credit card to pay off student loans is during the end of the repayment period, when your loan balance is low enough to be completely paid off with the balance transfer. Otherwise, it is ideal for the financially-focused borrower who is capable of making the minimum payments on both the balance transfer credit card and any student loan debt remaining.