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

Overwhelming student debt could slow down both current and newly college graduates’ development, even if they get good jobs. In 2020, nearly 45 million college students were reported to have an annual debt burden of $37,584, according to statistics collected by EducationData.org.

Although private university graduates are more likely to be in debt, public school graduates are not excluded. According to EducationData.org, they have an average debt of $30,030. In 2020, the gross amount of student debt in the United States was $1.68 trillion, growing six times faster than the overall economy.

With tuition steadily escalating and the backlash from a wide-ranging pay-to-play controversy at prestigious four-year schools, it’s no surprise that many prospective students are reconsidering the appeal of a college degree. Many that have already completed or fallen out of college or vocational education, on the other hand, may not have that choice. They’ll have to pay the bill. And they’re fighting tooth and nail to hold their heads above water.

For certain creditors, staying on top of student loans necessitates a more sophisticated “all of the above” plan than merely setting up an automated monthly payment and hoping for no unforeseen financial difficulties during the decade or two until the last monthly payment or loan repayment deadline comes.

A low-interest credit card balance transfer is a little-discussed part of this “all of the above” plan that is suitable for millions of private student loan borrowers with strong credit.

While credit limitations and cash flow realities can prohibit a borrower with average — or even above-average — income and a $35,000 average student debt balance from paying off their entire student loan balance in a single 12- to 24-month low-interest balance transfer cycle, this approach may significantly reduce student debt balances and accumulated interest obligations. It may be a determining factor in reaching student loan freedom ahead of time if replicated long enough.

This technique, which is a form of student loan refinancing, isn’t without its drawbacks. Some are self-evident, such as failure to pay off the exchanged debt until the low-interest period ends, resulting in a daily credit card interest rate that is many times greater than the initial loan’s. Others are less well-known, such as a large uptick in loan usage that jeopardizes a borrower’s potential credit acceptance chances.

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Planning and Method for Reducing Student Loan Debt with Low-Interest Credit Cards

college student thinking about his future

A credit card balance shift is not anything to be taken lightly. Consider if transferring a portion of your student loan balance to a new or current credit card is the best option for you. If you decide it is, you’ll need to know how to manage the refinancing procedure, prevent overpaying through carefully using the balance transfer function, and choose the best balance transfer card for the job.

Check To See Whether You’re Eligible for a Credit Card Balance Transfer

To start, you must first decide if you are a successful applicant for a credit card balance transfer. Put off your proposal for a couple months if you’re not a successful applicant. Instead, concentrate on strengthening your current job.

Your credit score is the most significant factor to remember. The majority of 0% APR balance transfer offers are only available to applicants with outstanding or exceptional credit. Approval requirements differ by credit card issuer and card, although the lower your FICO credit score is below 700, the less likely you are to be accepted.

To figure out where you are, glance at your credit score. If your score isn’t where you want it to be, concentrate on the areas that require the most improvement. Unfortunately, this takes time since the two most critical credit score indicators — payment history and credit usage — will take months to adjust significantly by timely payments and paying down current credit balances, respectively.

Credit usage, the ratio of your active credit accounts (the numerator) and total usable credit, is one aspect that deserves particular consideration in this sense (the denominator). Balance transfers between two credit card accounts, referred to as “natural” credit card balance transfers, have little negative effect on borrowers’ credit usage. This is so they don’t apply to the numerator because the balance on another credit card still remains. However, since student loan balances are not considered used credit for credit scoring purposes, converting a student loan debt to a new credit card will, and sometimes does, have a negative effect on credit usage.

This will result in a temporary drop in your credit score and a resulting drop in your chances of obtaining new credit. This may be a concern if you intend to qualify for additional credit in the immediate future — for example, if the reason for paying off your student loans sooner is to save up cash for a new vehicle or a home mortgage.

Federal Student Loans Should Not Be Included When Transferring Balances

Don’t really suggest consolidating the federal student loans. This technique can only be used with private student loans.

What is the reason for this? Since federal student loans come with a slew of borrowers-friendly features, including a variety of opportunities for modifying or deferring payments in the event of financial distress — phrases including deferment, forbearance, and modified repayment schedule, to name a few. Their borrowers are also potentially registered for government financial aid schemes, such as the waiver of student loan fees when the coronavirus pandemic is ongoing. Furthermore, publicly subsidized student loans have built-in forgiveness schedules, with borrowers with qualified public sector occupations spending as few as 10 years of qualifying payments with most other borrowers paying as many as 20 years.

These advantages aren’t just words on a screen. They may be the difference between getting through and needing to make difficult decisions to remain afloat in times of severe financial difficulty. They’re mostly only for federal homeowners who haven’t merged or exchanged their debt. You’ll be left with a lot less versatile credit product until you’ve completed the balance transfer.

Loans With Higher Interest Rates Should Be Prioritized

Paying off higher-interest loans first is a tried-and-true method for lowering your student loan’s overall (lifetime) expense. It’ll also likely speed up the payoff by allocating some of each payout to principal instead of interest. It also allows it to locate a transfer card with a lower interest rate, or at least one that is low enough to justify the transfer.

The strongest candidate for a balance transfer is the highest-interest balance that is small enough to transfer in its entirety — that is, one that is less than the permitted credit line on the balance transfer card. However, you won’t realize how much money you’ll be able to pass before your application is accepted.

Check To See if Your Loan Servicer Accepts Balance Transfer Fees, and if So, How It Expects To Be Paid

Be sure the student loan servicer offers lump-sum payouts through credit card balance transfer before heading through the hassle of applying for a balance transfer credit card. There’s no excuse to think something won’t happen — loan servicers deserve to get charged at the end of the day — so there’s also no use in putting yourself in the position of having to deal with an unexpected surprise.

Carry out the same procedure for the issuers of the cards you choose to register for. While most major issuers approve balance transactions, the stakes are large enough that it’s worth calling to double-check.

If the arrangement differs from a traditional card-to-card swap, you’ll still want to figure out how your loan servicer likes to be billed and if the issuer needs to make the transfer. You can double-check if the two are compatible. For example, considering the servicer’s policy of only receiving payment by the creditor, the card issuer might choose to conduct the transfer by paying the student loan servicer directly, in which case you may need to convince the issuer to cut you a check for the transfer sum.

This shouldn’t be an insurmountable barrier — servicers just want to be compensated — but it will necessitate further effort from your part. And, if the lender should write you a check, be sure it’s for a balance transfer rather than a cash advance, which isn’t likely to qualify for a low or 0% APR offer and could come with higher fees.

Make a Decision on How Much You Want To Transfer

“Don’t move more than you can pay off during the discount period,” is the cardinal law in credit card balance transfers. Many limited student loan balance changes are preferable to a single large move that costs much more than the initial loans.

A fixed-balance, high-interest loan that can be converted in its entirety — ensuring it’s less than the card’s accepted credit line — is the best student loan to move to a low or no-interest credit card. This has four benefits assuming you pay the whole balance within the promotional period:

You’ll be able to pay off a debt entirely without spending any further interest.
By removing a whole debt from your ledger and rendering the rest of your student loan balances feel more manageable, you’ll earn a morale-boosting “win.”
If your wages and spending don’t alter in the future, you’ll have enough resources to add into your outstanding student loans.
In the meantime, your credit score is expected to grow, making you more enticing to lenders and eventually opening the door to more low-interest balance payment opportunities that you might use to pay off student loans — perhaps with higher credit caps.

Examine Balance Transfer Card Offers and Understand Transfer Fees

Consider the following key factors when assessing balance payment card deals to help you minimize the scale of the transfer:

Interest Rates on Promotion

New applicant balance swap packages often promote an interest-free duration. It’s obviously superior to a low-but-not-zero bid if you apply for one. Current cardholders are most likely to be given low-interest deals, which usually vary from 1% to 10% APR. As a general rule, a conversion isn’t worth the initiative until you can lower the interest rate by four percentage points, such as from 8% to 4%.

Promotional Time Duration

It’s worth repeating — and repeating — that: It’s important that you pay off the whole balance transfer before the promotional deadline expires. Otherwise, you might be liable for interest not only on the remaining balance, but also on the whole initial value of the exchanged balance, retroactive to the conversion date. That’ll almost certainly wipe away everything you figured you’d saved. As a result, a longer discount time allows for a bigger transition, so look for packages with very long low-APR or 0% APR periods: at least 12 months, ideally 15 or 18 months, if not longer.

Fees for Transfers

Fees for balance transactions normally vary from 3% to 5% of the overall sum transferred, or $30 to $50 per $1,000 transferred. Although this may not appear to be a significant amount, balance transfer fees significantly increase the cost of the transfer, particularly over short periods of time. A 3% balance transfer charge, for example, contributes 6% (annualized) to the expense of a transfer that requires six months to complete. Be sure you won’t pay more in balance swap payments than you will in interest on the initial loan over the payoff time before continuing with the transfer. When you learn that you can, you are best off paying down the debt rather than moving it.

Don’t Expect to Be Able to Transfer Any Remaining Balance After the Promotional Period Has Ended

Using a credit card balance transfer to pay down half or more of a student loan balance would definitely increase the credit score over time. However, you shouldn’t expect to be able to hold the party going until the promotional time on the first transfer card expires by moving the remaining balance to a new transfer card. You can’t only say you’ll be accepted for a new passport.

Since demonstrating that you can pay off a large transferred balance, you’ll most likely be eligible for other balance transfer deals. Although the possibility of not doing that — of being stuck with hundreds of dollars in interest owed on an outstanding debt — is too high to take.

The best course of action is to prepare to pay down your converted student loan debt in full before considering a second shift. You can run numerous balance transfers in tandem if time is of the essence and your credit is decent enough to qualify you for additional balance transfer deals when the first is already active. Again, when the advertising cycle comes to an end, be cautious not to leave a residual balance.

Final Thoughts

Credit card balance transfers are used by many debt-burdened consumers to reduce or remove high-interest credit card debt. While it isn’t often debated, converting student loan balances to credit cards with low-interest promotional periods is undeniably a viable option for managing school debt guaranteed by private lenders.

Sure, it’s a good tactic, but it’s not a magic bullet. Anyone considering this route should be aware of the dangers, including the possibility of paying far higher interest than a standard federal or private student loan if the debt isn’t paid off before the end of the promotional time. Otherwise, this student debt cure might end up being worse than the disorder.