Understand special considerations for transferring student loans to no-interest credit cards. Get the Money Girl book at http://MoneyGirlBook.com
Money Girl
340 MG Using No-Interest Credit Cards to Pay Off Student Loans
(upbeat music) - Hello and welcome to another weekly edition of the Money Girl Podcast. I'm Laura Adams, the author of Money Girl Smart Moose to Grow Rich. Grab a copy of the paperback or ebook from your favorite bookseller. 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." 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 six 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 and 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 three to 5% of the amount you transfer, it 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 smart financial move. To know if a new 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, complete with 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. I'll include links to these resources in the show notes on the money girl page at quickandertietips.com. 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. That means your new balance would be $4,120. Dividing that amount by 24 months shows that if you pay $172 per month, you'll have it paid off by the end of the promotional term and won't have to pay a penny of interest. Now that you understand the basics of balance transfer credit card offers, let's talk about using them specifically for student loan debt, which is what Sandy asked about. Because qualified student loans have special benefits, here are three major drawbacks to consider when using no interest credit cards to pay them off. Number one, you give up tax benefits. For 2013, you may be eligible to deduct up to $2,500 in interest for federal or private student loans, even if you don't itemize deductions on your tax return. This saves money by reducing the amount of tax you have to pay or increasing your tax refund. However, credit card interest is never tax deductible. So you never get to claim a student loan interest tax deduction when debt is transferred to a credit card. Number two, you give up repayment options. Most federal student loans come with a variety of repayment alternatives to help you manage your finances if you get into trouble. For instance, income-based repayment allows you to reduce monthly payments to a small percentage of your current income, or you may be able to defer payments altogether for a period of time. These options are typically not available, however, for private student loans. Credit card companies, on the other hand, are much less forgiving when you have a hardship. Getting behind on payments will cause your credit score to take a nosedive. And three, you give up forgiveness options. Working for the government as a teacher in low-income communities or in public service can make you eligible for forgiveness on federal student loans after working for a certain number of years. But once you transfer student loan debt to a credit card, those forgiveness options disappear. So if I've convinced you that using a credit card to pay off student loans may not be the best idea and you decide to keep your student loan as is, here are tips to pay them all faster. Make larger or more frequent payments. While this might seem obvious, paying down your principal balance ahead of schedule means you'll pay less interest and save money. Ask about interest rate discounts. Depending on your situation, your lender may be able to cut your interest rate. Signing up for automatic electronic payments, having a history of on-time payments or having an excellent credit score may qualify you for a rate deduction. And consider loan consolidation. If you have multiple student loans, a consolidation could be a smart move if it would significantly reduce the overall interest rate that you have to pay and not if it's a wash or would leave you with fewer repayment options or benefits. To sum up, a no interest offer is a powerful financial tool. Doing a balance transfer, especially for student loans, is like using a chainsaw to clean up a fallen tree. You can get the job done or you can really hurt yourself if you're not careful. So be sure to do your homework, get advice and make the best financial move for your situation. If you have a money question, email it to me at money@quickanddirtytips.com. I answer as many as I can on a podcast or on the free Money Girl newsletter. If we haven't connected on social media yet, please visit Facebook and do a search for Money Girl. On Twitter, you'll find me under username @laraattoms. Everything I mentioned is on the Money Girl page at quickanddirtytips.com. To read a transcript of this show, look for episode number 340 called using no interest credit cards to pay off student loans. I'm glad you're listening to Ching. That's all for now, courtesy of Money Girl, your guide to a richer life. (upbeat music) (upbeat music) [MUSIC] [ Silence ]