Using Zero Percent Credit Cards to Pay Off Student Loans

Using zero percent credit cards to reduce student loan payments has some potential drawbacks you should know about.
By Richard Barrington

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In college you probably encountered questions for which there was no one right or wrong answer — the best response depended on the situation. This experience can help you with a decision about something else you probably encountered in college — student loans.

Specifically, consider the question of paying off student loans with zero percent credit cards. This is a popular topic for for financial advice articles, but unfortunately, in making the suggestion many of these articles fail to properly cover the potential drawbacks of the idea.

It’s possible that using zero percent credit cards to make some of your student loan payments can save you some money, but it could also get you into trouble. To understand the issue well enough to make the right decision for your situation, it’s a good idea to ask some informed questions first.

0 interest credit cards to retire student loans

Here’s what you should consider before you transfer a student loan balance to zero percent credit cards:

  1. What is the interest rate after the zero percent period? These special credit card offers only suspend interest charges for a limited period of time. After that, the card starts charging interest, and that interest rate will almost certainly be well in excess of your student loan interest rate. Currently, the average rate charged on credit card balances is 15.32 percent, but most students who are just starting out with a limited credit history are likely to see a considerably higher rate, possibly in excess of 20 percent. The point is, don’t transfer more than you can comfortably pay off during the zero percent period, and keep in mind you still may have some remaining student loan payments to make concurrently.
  2. Is there a balance transfer fee? Though 0 interest credit cards may charge no interest for a period of time, they often charge a fee on balances transferred over to them. These are generally assessed as a percentage of the amount being transferred, which adds to the total amount you owe and might translate to an excessively high interest rate on the portion of the balance you will be paying off within the first few months.
  3. How much of your loan will your credit limit cover? Considering student loans are often structured to be paid off over a period of 15 years while a zero interest period may last for only a small fraction of that, don’t expect to be able to wipe out all or even most of your student loan debt by transferring the balance to a zero percent credit cards. Your credit limit will restrict the extent to which you can employ this strategy, and card companies tend to extend fairly low credit limits to young people without much credit history.
  4. What will adding a new card do to your credit rating? If you are wondering how to pay off student loans and plan to work around the credit limit by opening a series of 0 interest credit cards, keep in mind that every time you apply for credit it hurts your credit rating, as does having relatively new credit accounts. The damage to your credit rating could make subsequent credit more expensive and tougher to get.
  5. Are you losing loan forbearance features? Government loans have a number of features that may allow you to defer payments interest-free or at least delay when payments are due under certain circumstances, such as during times of financial distress. Don’t expect to find credit card companies so flexible, so think before you give up these options by transferring a government-backed student loan balance to a credit card.

At best, using zero percent credit cards to pay off student loans seems only a partial solution. It may save you some money, as long as you understand the payment schedule that would result and are prepared to keep up with it.

About Author
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).