Anyone who has paid attention to their debts (or investments), knows that interest adds up quickly! In fact, if you made the calculation to find the daily interest you accrue on your debt, you are keenly aware of exactly how much interest is costing you. Paying down the principle is the most obvious way to reduce the burdensome interest. The faster you pay off the debt, the less interest you’ll have to pay.
We are doing something a little unconventional to reduce the amount of interest that we pay. It’s nothing complicated or illegal, but it’s definitely not for everyone. In fact, some of you might even hate the idea. While I surely don’t recommend this strategy for most people, it can work nicely for the right person in the right situation.
Not for Everyone
If you aren’t 100% committed to paying off your debt, this strategy could come back and bite you. There is some risk involved. If your income situation is unstable, I wouldn’t try it. If you have had problems with credit card debt in the past, then this strategy isn’t for you. Also, this only works for us because our required monthly student loan repayment amount is $0. If we used a credit card to pay of part of the loans, and then had to make both loan payments and credit payments each month, it would be more difficult.
However, if you are organized, responsible with credit cards, willing to take some risk, can confidently cover the payments you incur, and are totally committed to paying off your debt asap, then this strategy could save you some money in interest.
Improving Upon Experience
Two years ago, we used a credit card balance transfer to pay off $11,000 of student loans. We weighed the risks and benefits of using balance transfers to pay off debt and decided on a conservative amount for the promotional period (after which the interest goes up drastically). We paid it off in time, saved money on interest, and learned several important lessons in the process. Afterwards we looked at the complete picture to see how much we actually saved. We decided that we would be willing to use balance transfers again to save interest on our student loans, only we’d be even smarter in the future.
In particular, would be smarter by:
- Waiting for a 0% APR offer. While 2.9% was less than what we were paying for student loan interest, we should have held out for (or asked for) a 0% rate.
- Waiting for $0 transfer fee. Anything we have to pay in transfer fees eats into the amount of money we are able to save with this strategy.
- Not making any other purchases (or automatic payments) with the card to keep it simple and ensure we aren’t paying any interest.
Using Balance Transfers to Pay Off Debt
Well, we’re doing it again!
A couple weeks ago we got a balance transfer offer in the mail for our USAA Mastercard. The offer give us 0% APR on balance transfers for 13 months. Balance transfers made within the first month of the offer have no balance transfer fees. This is the ideal offer for our purposes because:
- 0% APR means we will pay no interest as long as the balance is paid off by the end of the promotional period.
- No fees means making the transfer won’t cost us anything at all up front.
We paid off our current balance on the credit card a little early and then put the card away where we wouldn’t accidentally use it for some other purchase. We made sure there were no recurring payments made with that card. We used the convenience checks provided with the balance transfer offer to write large checks to ourselves. Last time we learned that our account has a maximum electronic deposit of $10,000 per day, so we wrote two checks to ourselves: one for $9,000 and one for $6,000. We deposited them in our checking account on two consecutive days. When the checks cleared, we had an extra $15,000 in our checking account. We logged in to the student loan servicing account and used every last cent of that $15,000 to put toward student loans.
Why did we choose $15,000? Basically, that was an amount that we knew we would be able to take care of well within the time frame.
Now our Mastercard has a balance of $15,000. It won’t get any interest for a year. We will work to pay it off as soon as possible. Looking at our track record, we are confident that we will be able to pay off that amount within the allotted time and hopefully much sooner. In the meantime, our student loan servicer will keep charging interest on the remaining amount, but it will be on $15,000 less of principal.
How Much Will We Save?
Looking at an amortization schedule for a 12-month loan in the amount of $15,000 loan at 6.55% interest shows monthly payments of just under $1,300 per month. Over 12 months, we would pay $537 in interest. With a 0% interest balance transfer with no fees, we will save approximately $537 in interest.
The figure will vary depending on how much we actually pay each month and whether it takes us the entire 12 months or not. Since we are putting everything possible toward our debt, no two months of debt repayment are exactly the same. Hopefully most months will have a higher payment than $1,300, so we will knock out $15,000 in less than a year.
We’ll keep you posted if anything interesting or unexpected happens.
How About You?
- Would you ever consider using a balance transfer to save money on interest? Why or why not?