Should I get cash from credit card at 0% for 8 months and put it on loans?

I have approx $100K in student loans, and am still in my grace period. I am able to get approx $4K cash from my citibank card as a special promotion. I would not have interest on the card until April 1st, 2015.

Is there any real benefit to maxing the card, putting the money directly onto my loans, and then for the next 8 months paying less on loans and paying off the card? It is worth noting that I am employed, and could pay off the card in that time with no issues. I also have no other debt aside from the loans.

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4 Responses to “Should I get cash from credit card at 0% for 8 months and put it on loans?”

  1. If there is any fee at all on the cash advance, and zero interest on the student loans (for now), it’s not worth it mathematically.

    And for only 8 months of “free” money, it’s rare for it to be worth it overall. You need to save a significant amount either by having a good net interest rate (e.g., saving 20% on another card and not paying any interest on the new loan) or by saving a lot on principal (e.g., paying off $100k now and not paying the interest on that for the next 8 months).

    I wouldn’t worry about it hurting your credit score unless your credit is going to be evaluated during the time you’re maxing your card. Part of your score (20-30% IIRC) is your credit utilization ratio, which is how much you have available vs. how much you’re using. It’s separate from the part that accounts for history, so it’s only relevant at the time you’re looked up.

  2. On the face, this appears a sound method to manage long run cumulative interest, but there are some caveats.

    Maxing out credit cards will destroy your credit rating. You will receive no more reasonable offers for credit, only shady ones. Though your credit rating will rise the moment you bring the balance back down to 10%, even with high income, it’s easy to overshoot the 8 months, and then a high interest rate kicks in because of the low credit rating.

    Further, maxing out credit cards will encourage credit card lenders to begin cutting limits and at worse demand early payment.

    Now, after month 6 hits, your financial payment obligations skyrocket. A sudden jolt is never easy to manage. This will increase risk of missing a payment, a disaster for such hair line financing.

    In short, the probability of decimating your financial structure is high for very little benefit.

    If you are confident that you can pay off $4,000 in 8 months then simply apply those payments to the student loan directly, cutting out the middle man. Your creditors will be pleased to see your total liabilities fall at a high rate while your utilization remains small, encouraging them to offer you more credit and lower rates.

    The ideal credit card utilization rate is 10%, so it would be wise to use that portion to repay the student loans.

    Building up credit will allow you to use the credit as an auxiliary cushion when financial disaster strikes. Keeping an excellent credit rating will allow you to finance the largest home possible for your money. Every percentage point of mortgage interest can mean the difference between a million USD home and a $750,000 one.

  3. There are two issues here: arithmetic and psychology.

    Scenario 1: You are presently paying an extra $500 per month on your student loan, above the minimum payments. Your credit card company offers a $4000 cash advance at 0% for 8 months. So you take the cash advance, pay it toward the student loan, and then instead of paying the extra $500 per month toward the student loan you use that $500 for 8 months to repay the cash advance. Net result: You pay 0% interest on the loan, and save roughly 8 months times $4000 times the interest on the student loan divided by two. (I say “divided by two” because it’s not the difference between $4000 and zero, but between $4000 and the $500 you would have been paying off each month.) Clearly you are better off.

    If you are NOT presently paying an extra $500 on the student loan — or even if you are but it is a struggle to come up with the money — then the question becomes, can you reasonably expect to be able to pay off the credit card before the grace period runs out? Interest rates on credit cards are normally much higher than interest rates on student loans. If you get the cash advance and then can’t repay it, after 8 months you are paying a very steep interest rate, and anything you saved on the student loan will quickly be lost.

    What I mean by “psychological” is that you have to have the discipline to really repay the credit card within the grace period. If you’re not very confidant that you can do that, this plan could go bad very quickly.

    Personally, I’ve thought about doing things like this many times — cash advances against credit cards, home equity loans, etc, all give low-interest money that could be used to pay off a higher-interest debt. But it’s easy to get into trouble doing things like this. It’s easy to say to yourself, Well, I don’t need to put ALL the money toward that other debt, I could keep a thousand or so to buy that big screen TV I really need. Or to fail to pay back the low-interest loan on schedule because other things keep coming up that you spend your money on instead, whether frivolous luxuries or true emergencies. And there’s always the possibility that something will happen to mess up your finances, from a big car repair bill to losing your job. You don’t want to paint yourself into a corner.

    Finally, maxing out your credit cards hurts your credit rating. The formulas are secret, but I understand that if you use more than half your available credit, that’s a minus. How much it hurts you depends on lots of factors.

  4. Do you know how many people end up with an 18-21% rate on their credit card? They started off with low teaser rates. There was an article about it recently on Yahoo. Mainly this comes from a lack of discipline, or an unforeseen emergency. However, lets assume, that you are a bit uncommon and have iron discipline.

    It comes down to a math question. What is the rate on your student loan? I am going to assume 6%, and lets say that you are now paying interest. So there is 7 months between now an then, you would pay $140 (4000 * .06/12 * 7) in interest if you left it on the student loan.

    Typically there is not really a free lunch with the zero percent interest rate CC. They often charge a 3% balance transfer fee, so you would pay that on the entire amount, about $120.

    Is it worth the $20? I would say not.

    However, those simple calculations are not really correct. Since you would have to pay the CC $588.6/month to take care of this, you have to shrink the balance on the student loan to do a true apples to apples comparison.

    So doing a little loan amortization, you can retire $4000 on the student loan only paying $583/month, and paying a total of $80.40 in interest.

    So it would cost you money to do what you are suggesting if there is a 3% transfer fee.

    Even if there is no transfer fee, you only save about $80 in interest.

    If it was me, I would direct my energy in other areas, like trying to bring in more money to make this student loan go away ASAP.

    Oh and GO STEELERS!