Ask YOUNG MONEY: Should I transfer my student loan balance to a low interest credit card?
Dear YOUNG MONEY,
Of the many student loans I have, two of them are private TERI loans, currently at 8.25% with no cap. They total about $17,500. One of my credit cards is having a balance transfer promotion of 3.99% for life. It also will charge me $75 to do this transaction, but I figure it’s a small price to pay for the savings in interest. I have an $18,600 limit on the card, and so if I transferred this balance I would just about max out the card. Of course, I would use another card for future purchases until this balance is paid off.
What do you think about this decision? Does interest accrue differently on credit cards, and in such a way that may work to my disadvantage here?
Thanks so much!
Thank you for reading Young Money and thank you for the email.
Initially this could look like a no-brainer but watch out! This could be a big financial mistake. I know the lower rate seems attractive but credit cards accrue interest on outstanding balances daily. I would guess, without seeing your loan paperwork, that your student loan is a simple interest loan. In fact, with your student loan you have options for deferment and payment of interest only if you are still in school. With a credit card you would have only one option, pay the monthly minimum payment every month or face a default penalty interest rate, and damaged credit.
TERI loans also allow repayment of some loans over 25 years which would lower your monthly payment. If you transfer the balance to the credit card and can afford to pay $150 per month to the credit card balance it will take you 12.3 years to pay it off. Visit the TERI Loan website for more information and assistance with your particular loan.
Maxing out a credit card account will automatically hurt your credit rating by bringing down your score for using more than 50% of the available balance. Watch out for the default penalty rate if you were to make a credit card payment late one or two times. The default rate would take the place of the 3.99 rate and could be as high at 30%. Read the fine print on the offer carefully.
If it were me, I would look for ways to increase my income to have more money to pay toward the debt each month and avoid taking on more debt until the loan is paid off. I’d also look for opportunities to consolidate the student loan to other simple interest vehicles in the future. Unfortunately, it will be tough to find an unsecured loan at less than prime rate of 8.25% these days.
Keep us posted.
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