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I received an offer from a credit card company where they give you a check and anything you write on that check can be used for 12 months with 0% interest. I have clients with student loans and it got me thinking if this could be used as a creative way to speed up the repayment process.
Here's a scenario:
Let's say you have a substantial student loan balance ($55,000 at 6.9%) Interest payments are roughly $316.25 a month or $3795 a year
Let's say you use the check to pay off $15,000 off of the balance. The plan is to pay enough interest to keep the student loan balance constant and then pay the additional $15,000 off in 12 months.
So now you have a $40,000 balance, lowering your interest payment to roughly $230 a month and roughly $2760 a year.
You would need $1,250 a month ($15,000/12) + roughly $230 a month= $1480.00to end up with the $40,000 balance at the end of the year. $15,000 of the $17,760 would got to paying off the actual balance amount.
If you used the credit card check to transfer $20,000 the efficiency ratio is even more desirable.
It would lower the Student Loan balance to $35,000, the monthly interest to $201.25, and it would lower the yearly interest to $2415.
You would need $1,666.67 a month ($20,000/12) + roughly $201.25 a month= $1867.92 to end up with the $35,000 balance at the end of the year with $20,000 of the $22,415 going to the actual balance amount.
Also, with some of these credit cards you get a cash back rewards which could be used to pay off the Credit card balance even quicker.
Has anyone ever done this or do you have any thoughts/ comments?
I received an offer from a credit card company where they give you a check and anything you write on that check can be used for 12 months with 0% interest. I have clients with student loans and it got me thinking if this could be used as a creative way to speed up the repayment process.
Here's a scenario:
Let's say you have a substantial student loan balance ($55,000 at 6.9%) Interest payments are roughly $316.25 a month or $3795 a year
Let's say you use the check to pay off $15,000 off of the balance. The plan is to pay enough interest to keep the student loan balance constant and then pay the additional $15,000 off in 12 months.
So now you have a $40,000 balance, lowering your interest payment to roughly $230 a month and roughly $2760 a year.
You would need $1,250 a month ($15,000/12) + roughly $230 a month= $1480.00to end up with the $40,000 balance at the end of the year. $15,000 of the $17,760 would got to paying off the actual balance amount.
If you used the credit card check to transfer $20,000 the efficiency ratio is even more desirable.
It would lower the Student Loan balance to $35,000, the monthly interest to $201.25, and it would lower the yearly interest to $2415.
You would need $1,666.67 a month ($20,000/12) + roughly $201.25 a month= $1867.92 to end up with the $35,000 balance at the end of the year with $20,000 of the $22,415 going to the actual balance amount.
Also, with some of these credit cards you get a cash back rewards which could be used to pay off the Credit card balance even quicker.
Has anyone ever done this or do you have any thoughts/ comments?
Hope you realize that the interests saved in the 2 scenario are:
$3795 - $2760 = $1035
or
$3795 - $2415 = $1380
Note that a lot of these CC offer will have 1%-5% transaction fee. Some are 0% but a lot are not. Note that you are not going to be earning any points for these BT. You are also going to have to be very careful with using this CC. Your credit score may be hurt by this as well.
I love 0% BT from CC but it's not a game for everyone to play with unless you have a backup plan. Based on what you posted so far, I don't see one.
Better hope you don't miss a payment. As I understand it, if you don't pay off the transferred balance in full at the end of the period, you can get whacked with interest for the entire balance, not just the unpaid part. Check the small print carefully. (I'm not an expert on balance transfers, because I never read those offers from the credit card companies; they serve only as food for my shredder.)
It sounds like your plan might work, though it's not without its potential pitfalls. How risk-averse are you?
As pointed out, the numbers look good on paper but there can be pitfalls in the real world.
I recommend living as frugally as you can and taking a second job on weekends for several years. Build a good savings account first and then start tossing as much money as you can at the student loan.
That's less risky in the long run than playing games with credit cards. The banks are like the casinos: all of the rules are rigged in their favor, not yours. Yes, people occasionally get lucky, but the odds aren't in everyone's favor.
Better hope you don't miss a payment. As I understand it, if you don't pay off the transferred balance in full at the end of the period, you can get whacked with interest for the entire balance, not just the unpaid part. Check the small print carefully. (I'm not an expert on balance transfers, because I never read those offers from the credit card companies; they serve only as food for my shredder.)
It sounds like your plan might work, though it's not without its potential pitfalls. How risk-averse are you?
That's usually not the case but like you stated. Read the fine print. All the BT I've done, I never seen it that way.
You also don't have to miss a payment to get default. They will do credit check on your account every month. OP plan is a terrible one unless s/he has a backup plan. A backup plan includes the ability to pay back the entire BT with a short notice.
What would be the interest savings versus just paying an extra $1,500 or whatever amount per month? Is it worth the risk if you didn't pay back the CC by the end of the 12 month period?
You typically don't get points on balance transfers, and a 3% or 4% fee is common. I'm not sure that a direct payment to a student loan is even allowed. The person would more likely have to take the money as cash and then write a check to convert it to unsecured debt. Post 0% interest is typically in the 16%+ range on the balance remaining, so it would need to be paid off or kited to a different offer before the end of the 0% interest period.
Would the plan work? Sure, for someone with discipline. For someone who has money handling problems it would be a potential disaster though.
There is a personal finance blogger I follow who is doing this very thing: SixFiguresUnder - Using Balance Transfer to Pay Down Student Loan Debt. Her husband has a large amount of law school debt and they have a big family. It seems to be working for them, particularly as the income he earns is so low that they are not required to pay anything on his loans (income-based plan). If the had to make a student loan payment and ALSO pay on the credit card monthly, it would fall apart.
1. One loses the right to defer the loan(s)
2. One loses the right to take the interest paid income adjustment up to $2500.
3. The card company may have a transaction fee, the default interest could sink you.
4. The majority of people are not disciplined enough to pay if off before the offer expires. These are the same idiots that buy sofas n crap at 0% and wonder why they’re broke on the 13th month.
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