There are many different opinions about using a balance transfer credit card to pay off debt. There are some who say “bring it on.” Others swear that it’s a terrible way to get out of debt. I understand both sides of the argument but, depending on the situation, I tend to fall on the “bring it on” side of the equation.
I’ve used balance transfers a couple of times to help lower my interest rates. This way, I can put more of my money toward paying off the principal of my debt instead of wasting it on high-interest charges.
In total, I’ve used balance transfers to pay off $5,284.18 of high-interest credit card debt. But now that I’m free of credit card debt, I’m considering using yet another balance transfer credit card offer to pay off a student loan. Here’s why:
I Have a Good Offer
Not all balance transfer credit card offers are created equal. Some will have offers of 1 to 3 percent interest for a certain introductory period — usually 12, 18, or 24 months.
The best balance transfer offers have a zero percent interest rate for the introductory period.
You also need to pay close attention to any fees when transferring your balance. Most balance transfer credit cards have a 3 percent transfer fee with a minimum of $5.
Some have a maximum charge of $50 or $75 per transfer, and while these costs are higher, they can be helpful if you plan to transfer a large balance that would otherwise have a much higher percentage fee.
Balance transfer credit card offers without a transfer fee are rare, but they do exist. In these rare cases, it’s almost a no-brainer to use it to pay off higher-interest-rate debt —that is, if you have private loans and the right income to repay those debts in time.
My current balance transfer option offers a zero percent annual percentage rate (APR) for 18 months and a transfer fee of 3 percent. I chose this one because it’s offered by one of my current creditors, and it allows me to more affordably tackle my student loan debt.
I Can Save Hundreds and Pay Off My Loan Faster
My student loan has an interest rate of 6.8 percent, so I’ll still be saving hundreds of dollars in interest by doing a balance transfer. In some cases, people with high interest rates can save thousands if they opt for a repayment vehicle with a lower percentage.
Plus, the time limit on the balance transfer credit card is great motivation. Why? Because if I don’t fully pay off the balance transfer in 18 months, the remaining balance will be subject to regular interest rates. Depending on your credit card, those interest rates could be over 15 percent — an ample incentive to go full-speed ahead.
Of course, this pending higher interest rate represents a risk of using this repayment option.
Risks of Paying Off a Student Loan With a Balance Transfer Credit Card
If you choose to repay your student loans with a balance transfer card, you must be able to pay off the amount in full before it expires. If you cannot, transfer it to a different card that offers worthwhile benefits.
If you don’t take either of these options, it won’t be long before your higher credit card interest rate erases any savings you might have made. You cannot miss a payment or pay late. Most introductory offers are void if you don’t pay on time.
Not to mention, keeping track of various credit cards can be cumbersome — especially if you are using more than one to finance anything, not just student loans. It can be difficult to continue to remain aware of all the terms, conditions, and dates.
Additionally, student loan providers are more forgiving than credit card companies. You might be able to qualify for income-based repayment or waived interest, among other options, depending on your earnings and remaining debt.
But when you transfer your student loan to a credit card, those options are no longer available.
If you lose your job, for example, you won’t have as many alternatives to help you with your payments. As such, it may be best for certain people to reconsider this option due to the risks inherent.
“If you have a federal loan, you should never consider using a balance transfer card to help with your loans,” says Robert Farrington, founder of The College Investor. “You’re much better served by income-driven repayment plans and loan forgiveness options. By moving away from federal loans, you lose those options. With private loans, [balance transfer] can make more sense, but there are risks associated.”
Of course, there are additional risks beyond simply losing access to benefits like loan forgiveness and hardship deferment options.
“The goal of a balance transfer is to usually take advantage of promotional zero percent APR offers,” Farrington adds. “However, these offers typically last only for a set period of time — around a year. If you take longer to pay off the loan, the APR on your credit card will likely be substantially higher than the APR on your student loan — meaning you’ll pay more in interest.”
The problems with balance transfer credit cards are not solely with repayment, however. “When you have an educational loan (whether federal or private), you’re potentially able to take the student loan interest deduction on your taxes,” Farrington adds. “When you convert it to a non-educational loan (i.e., a credit card), you lose that ability as well.”
The Bottom Line
Determining whether to pay off student loans with balance transfer credit cards is an important and difficult decision.
Make sure to weigh the risks and benefits before making any decisions, and consider the tax and repayment options available if you pay back your debt in the traditional method.
All the same, paying off student loans with a balance transfer credit card can be a good idea if you have private student loans and your main goal is to get out of debt quickly.