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About me:

I make about $3330 a month from my job after taxes.

I'm currently $72,500 in debt from student loans, 7% APR. I have 0 other forms of debt (I live with my parents and bought a used car for cash).

I spend about $300-$400 a month on myself on a credit card, and pay it off monthly. The rest of my paychecks go straight into my loan debt.

I just got approved for the Chase Freedom card, because I wanted the $200 signup bonus to put towards my debt. I noticed after applying that I'll accrue 0 interest on it for the first 15 months as part of their 0% APR promotion.

So here is my question: Would it make sense to stop paying down my credit card balance every month, and instead put my full paycheck (except the minimum card payment) into the loan debt? In about 12 months, I would focus all my pay on the Chase card so I never pay CC interest, then go back to what I currently do, but now with reduced interest gain on the student loans. I'm considering this because that 7% is making my debt over $400 larger every month.

Putting the credit card debt off for 12 months would allow me to put around $4800 extra into my debt, which I can pay off of the card in two months. In those two months, my loan debt will gain interest a decent amount slower than it currently does.

Does it make sense to do this or am I deluding myself? I'm not sure if I have the math right but I'd like to take advantage of 0% CC interest for 15 months if there's a good way to do it. Thanks!

Edit: Someone changed my title to make the post misleading, and people just skimmed the title and didn't read the rest of the post before replying. To reiterate: I would not be gaining interest on the CC balance for 15 months due to the Chase promotion.

Also, I'm putting about $3000 into the loan debt every month. Because of the interest, it grows $400 more, so my $3000 is really worth $2600, which is what inspired this post. Sorry for any confusion there.

el toro
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    What is the credit card's interest rate? You didn't say. – Harper - Reinstate Monica Feb 04 '20 at 11:07
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    Wait, "that 7% is making my debt over $400 larger every month"??? Are you making just the minimum payment every month? – MonkeyZeus Feb 04 '20 at 13:10
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    "I noticed after applying that I'll accrue 0 debt on it for the first 15 months." Why? – RonJohn Feb 04 '20 at 13:49
  • Monkeyzeus: by my calculations they is paying $422/month in interest, and therefore about $2500 in principal on their student loan. That balance should be plummeting. If it isn't, then something is seriously wrong. – Buddha Buck Feb 04 '20 at 16:06
  • Hello, someone edited the post and made it very misleading. The CC debt will not increase because Chase has a promotion where you don't pay any interest for 15 months on accrued debt. Sorry for the confusion, I obviously would not accrue CC debt at 26% over student loan debt at 7%. – el toro Feb 04 '20 at 16:26
  • Assuming they are in the USA, if they do this, does this mean that cc debt is now covered under bankruptcy protections? – Gabriel Fair Feb 04 '20 at 16:28
  • Also sorry for the confusion about "gaining $400", I meant it like after I make a $3000 payment every month, it increases by $400, making my $3000 really only worth $2600, and thus inspiring this post. – el toro Feb 04 '20 at 16:30
  • @eltoro I think you've misunderstood the basics of a loan. Putting an additional $400 against your loan principal will not make the interest portion go away. Paying $3,400 per month will still send about $400 as interest. Find any student loan calculator with an amortization schedule such as https://www.bankrate.com/calculators/college-planning/loan-calculator.aspx and you will quickly see that an additional $400/month has a negligible advantage compared to the credit card risk. – MonkeyZeus Feb 04 '20 at 18:16
  • @BuddhaBuck See OP's update and my comment above. – MonkeyZeus Feb 04 '20 at 18:16
  • @MonkeyZeus I know it still goes up $400 a month. The idea was just to put more into the loan since it has a consistent 7%, where the CC has 0%. It was more of a mental comparison, gaining $400 to offset the $400 interest, than actual mathematical one. – el toro Feb 04 '20 at 18:28
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    You are already making healthy payments against your loan and you should be proud of that. You shouldn't stretch yourself so thin as to rely on a 15-month 0% interest CC just to shorten the loan by a few months. Tell me, what would your plan be if you lost your job at month #11 or had some other financial situation which prevents you from paying off the CC debt before month #15? – MonkeyZeus Feb 04 '20 at 18:33
  • @MonkeyZeus that's the consensus of the discussion here and why I've decided against doing it! Saving $200 is not worth it for the unpredictability of a whole year and the possibility of losing my job. – el toro Feb 04 '20 at 18:34
  • I'm reading through the answers and comments now and I see that you're making a wise choice; particularly https://money.stackexchange.com/a/119928/25694 covers what I commented. One thing which I did not see discussed is an emergency fund. I would recommend that you reduce your student loan payment by $200 and put that into a dedicated savings account. This would help with any unplanned financial hardships. – MonkeyZeus Feb 04 '20 at 18:40
  • Typically those "0% APR for n months" offers are conditional: it's only valid so long as you pay off your balance in full each month (which, yes, makes such an offer useless anyway). If you go even a single month without paying off your balance (certainly if you don't pay anything), you usually get immediately bumped up to the penalty APR rate which is typically >= 20%. So, make sure you read the fine print. – TylerH Feb 04 '20 at 19:55
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    @TylerH "it's only valid so long as you pay off your balance in full each month", what?? I think you've misunderstood something or whoever was talking to you did not have a clue what they were talking about. – MonkeyZeus Feb 04 '20 at 20:22
  • @MonkeyZeus It's a bit fuzzy now, but my Visa credit card thru my bank had that condition. 0% APR for the first n months (I forget how many months it was. Somewhere between 12 and 18) so long as you pay your balance off in full each month. I asked them what the point of it was since it would be 0% interest regardless of what the rate was if I paid it off in full each month but didn't get a satisfactory answer from them. But it was in fine print on the form I was filling out, otherwise I would not have bothered to ask. – TylerH Feb 04 '20 at 20:27
  • @TylerH Definitely not true for the cards I've owned. Many people will balance transfer from card to card and take advantage of the 0% intro periods of each specifically because they can't pay that balance in one pay period, and whatever other credit card they have has high interest. It's an actual debt management solution. There's a word for jumping from 0% card to 0% card, I don't remember what it is though. – el toro Feb 04 '20 at 20:30
  • @TylerH That is utterly contrary to everything I've ever experienced and read. The only thing I can think of is that maybe you had a balance transfer which needed to be paid right away to avoid interest but for your everyday charges you just need to pay the minimum according to your statement every month and pay it off in full before the promotional period ends or else you'll be paying retroactive interest. I would bet that the bank guy just didn't want to deal with your confusion. – MonkeyZeus Feb 04 '20 at 20:32
  • nobody's mentioned it, but look into consolidating/refinancing your loans down to a lower apr. going from 7% down to ~4% could give you the benefits you want of paying less interest and more principal per month. – thehole Feb 04 '20 at 22:18
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    @thehole At the rate OP is paying this loan off, it will be entirely gone in barely 2 years anyway. – corsiKa Feb 05 '20 at 03:11
  • @TylerH Are you sure it's entire balance? Normally it's simply "keep up with minimum monthly payment." – corsiKa Feb 05 '20 at 03:12
  • @TylerH Just to note, every credit card I have ever had has had this (0% APR if paid off in full every month) feature in perpetuity - it's called the "grace period". –  Feb 05 '20 at 19:36

7 Answers7

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Paying 0% on $400 instead of 7% saves you ~$2.33 each month. You'd still have to make minimum payments each month on the credit card, so you can't put all of that $400 toward the student loans anyway. Depending on the card agreement, if you run afoul of any of the credit card rules you'll lose your 0% interest and in some cases even owe all the deferred interest since day one. Likewise if you did not pay off the balance after 15 months you'd pay the much higher interest rate on the credit card.

In my opinion it's not worth the risk. Even with compounding a couple bucks a month isn't going to make that much difference in how fast you pay off your student loans. You're going to pay them off very quickly if you keep at the current rate, if anything I'd focus on doing things that will help you earn more money since your expenses are already minimal.

To clarify the net benefit, let's say you always spent $400 on your card each month, for 13 months you pay extra towards the student loans and then spend 2 months paying down the balance to ensure no interest due. Your minimum credit card payment would cut into the benefit, let's say it's $30 minimum payment. Ignoring the fact that there's a delay between the time you spend the money and your minimum payment is due, for 13 months you could save 7% interest on $370 each month. So month 1 you save $2.16, month 2 you save $4.32, etc. You could also think of it as that first month saves you $2.16*13 months, 2nd month $2.16*12 months, etc. The total saved interest would be just under $200 over 13 months. So it's not insignificant, but I still don't think it is worth it.

Hart CO
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    Wow, only $2.33? Like $30 total. See in my head I was thinking "well, that $400 I spend on me could go into the $400 interest every month, so over time it'd be worth it right!", but clearly it's not as much as I hoped. Thank you for the insight, I'll not be taking the risk then. – el toro Feb 03 '20 at 21:45
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    Also "If you run afoul of any of the credit card rules you'll likely owe interest on the balance accruing from day one" I didn't know that was a thing at all. Definitely not worth risking for $30! – el toro Feb 03 '20 at 21:45
  • @eltoro I edited to clarify the total benefit. – Hart CO Feb 03 '20 at 21:59
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    @eltoro I agree, it's one less thing to worry about. I've done 0% before on things and there's always a little anxiety that I'll miss a payment and have the whole pile of interest due, so now I just avoid it even if it could save me a little money. – Hart CO Feb 03 '20 at 22:01
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    Or put it on autopay and don't worry about it. – Harper - Reinstate Monica Feb 04 '20 at 10:58
  • To round out the math, over 13 months you'd accumulate about $5,000 of CC debt that you'd plan to pay off in the final 2 months. If you for some reason don't pay off that debt, 1 month of interest will cost you probably $750-$1000. If you think there's a 20% or greater chance that you'd miss paying the CC on time before interest starts accruing, then your net expected value (balanced against the potential interest savings) is negative, making this a losing proposition. If you're confident that you'd pay off the CC on time, then it may be worth it. – Nuclear Hoagie Feb 04 '20 at 14:58
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    @eltoro, that "interest on the balance accruing from day one" situation normally only happens with "store brand" cards and zero interest on large purchase deals. For instance, if you buy a $2000 TV on a Best Buy credit card and get zero interest for 24 months it will work that way. If you end up with a balance of $20 left on month 25, you get charged ALL 24 months of interest in one lump sum (around $500!). – JPhi1618 Feb 04 '20 at 16:11
  • Yeah even at $200 it's not worth it, for reasons like @Harper-ReinstateMonica put. What if I lose my job? – el toro Feb 04 '20 at 16:38
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    The sentence about owing interest from day one is incorrect. @JPhi1618 is correct that virtually only store cards ever have deferred interest. Chase Freedom does not, nor do any regular credit cards that have promotional APRs. – TTT Feb 04 '20 at 20:11
  • @TTT I get that, after I rolled back your edit I altered the wording to clarify without omitting that common part of 0% promotions. For others it's an important piece of info, even if not relevant with OP's specific card. – Hart CO Feb 04 '20 at 20:14
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    @NuclearWang er, I think there's an error in your math there. Maybe $5000 over a year would cost you $1000 in interest (20% APR), but to rack that up in a month would be an interest rate of over 200%! Still, your point stands that the interest per month would be pretty close to the total potential savings. – Kat Feb 04 '20 at 20:19
  • @HartCO - it's illegal for a 0% promotional APR to have backdated interest. The wording must be specific to deferred interest. More info here: https://www.thebalance.com/how-to-pay-no-interest-loans-4107392 – TTT Feb 04 '20 at 20:31
  • @Kat Thanks, as I was writing that, I knew it sounded like an absurd amount of interest, but didn't take the time to figure out why. You're correct, the interest per month will be somewhat less than the total potential savings, which makes the credit card a better option than I thought - you'd have estimate yourself at around a 2 in 3 chance of not paying the credit card for 1 month for this to have a negative expected value. But, depending on your risk-taking profile, it may not be worth it (likely a small potential upside, unlikely a big potential downside). – Nuclear Hoagie Feb 04 '20 at 20:39
  • @TTT, illegal where? I see TV ads several times a week from outfits that are apparently not only getting away with it, but not even trying to hide it. – WGroleau Feb 05 '20 at 16:28
  • @WGroleau Having deferred interest is not illegal. But it's illegal to use the wording "0% Promotional APR" if interest is deferred. They have to use different wording. See the link in my previous comment for details. There is also a specific section about 0% vs deferred. – TTT Feb 05 '20 at 17:24
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So what you're saying is, for 15 months, you'll let the $400/mo. of credit charges accumulate, and pay the $400/mo. toward the student loan instead. Over 12 months that will be somewhat shy of $6000. Averaging $2400 for a year, so at 7% that's ...

$168.

golfclap ... But hold on.

You'll put it on auto-pay for minimum payment, so you won't mess up.

So what you'll be doing is converting a high priority loan that can't be discharged in bankruptcy, to a low priority loan that can. Simply from an asset protection POV, this is a very good idea. Of course that's far from the whole picture, but using that technique to migrate undischargeable debt to dischargeable debt is smart. If the economy turns and you're forced to default, you'll be in $4800 better shape.

Asset protection is not "planning to fail", before you complain about that.
Asset protection is "not failing to plan"!

As a bonus, presuming you do not default, it will help build your credit rating.

As far as interest... You didn't say what the CC interest was. If it's 7%, keep doing this til the card is maxed obviously. If it's a litte more, judgment call. If it's a lot more, then follow your plan to nuke it down. The 15 months of debting will increase your credit score.

Harper - Reinstate Monica
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  • The CC interest is 0% for 15 months, which is why I'd be doing this. After that, it's something like 20-25%, but in those last two months I'd pay the $4800 balance down with my full pay. This post is very informative for if I didn't have a consistent pay though, because bankruptcy would be a valuable option. Thanks! – el toro Feb 04 '20 at 16:37
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    The 15 months of debting will increase your credit score. Not necessarily (at least short term). A few months ago I opened a new cc with a cash signup and 15 month 0% APR to save money on building a new computer I had the cash up front for. Opening the cc did nothing to my "Excellent" credit score. Putting over a grand on it a couple weeks later dropped my score 50 points to "Good" (<20% total credit utilization). According to my CC company's simulator, the only way to get back to where I was before is to pay off almost all my debt. – anjama Feb 04 '20 at 17:07
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    @anjama Protip, if you stay between 0-9% on your credit utilization, your score will basically always go up. Obviously opening a new card or missing a payment or other things can make it go down temporarily, but if you really want a high score, stay between 0-9%. – el toro Feb 04 '20 at 18:31
  • By my calculations, the total savings when the final loan payment occurs at month 27 is $236.79. This is assuming 1) total debt payment ability stays the same (at $3400) over the whole period 2) Months 14 and 15 split between paying off the card and the loan 3) Months 1-13 made a minimum cc payment of $20. – BlackThorn Feb 04 '20 at 20:36
  • @anjama "excellent" and "good" are not credit scores. Somebody is interpreting your credit score for you, and they are probably adding some cheese of their own. The only credit score that matters is FICO. At least that wacky score doesn't put it out as a number in FICO's general range of 400-900, typically companies that do that make you score 50-100 points higher than FICO, so you'll like them better. It's all fake of course. – Harper - Reinstate Monica Feb 04 '20 at 20:55
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Chase, and any other commercial bank, are not offering you free money out of the goodness of their hearts. They know that, statistically, you will end up paying them back significantly more than that.

The main problem with this plan is, besides Hart CO's excellent point that the amount you save is minuscule, is the risk that at the end of the 12 months you will have difficulties coming up with the $4,800. You say that you can pay it in two months, but even in the best case, these two months is likely severely eating into your planned windfall.

Think about all the unexpected things that could happen that makes you unable to come up with the $4,800, or even make you overspend and be even greater into debt.

Lastly, if you can come up with $4,800 in two months, just use that to put towards the loan as soon as you can and do not allow yourself to fall into the grasps of the credit card companies.

IKnowNothing
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    this: if you can come up with $4,800 in two months, just use that to put towards the loan as soon as you can. Best gain without the risk! – Matija Nalis Feb 04 '20 at 16:21
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    That's a great point too. What if I lose my job in 12 months and have $4800 of CC debt to figure out with only 2 months before it gains interest? Not worth the minuscule $200 return. – el toro Feb 04 '20 at 16:35
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    "Lastly, if you can come up with $4,800 in two months, just use that to put towards the loan as soon as you can and do not allow yourself to fall into the grasps of the credit card companies." Well this is fundamentally wrong because of what I said in the post. I put $3000 into my debt each month. I wanted to try to save the $400 I lose on myself by putting it on the 0% CC for 13 months, and in the last two I'd pay the CC back. So that's a bonus $4800 into my debt, which I pay back for the last 2 months of 0%, and never pay CC interest. That was the idea anyway, which has proven to be flawed. – el toro Feb 04 '20 at 16:41
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first 15 months ... 0% APR promotion.

Putting the credit card debt off for 12 months would allow me to put around $4800 extra into my debt, which I can pay off of the card in two months. In those two months, my loan debt will gain interest a decent amount slower than it currently does.

Does it make sense to do this or am I deluding myself?

If and only if you an pay off that accumulated $4800 in two months after the 0% APR promotion, then it's mathematically sound.

But you've got to actually do it!!!! Otherwise, you've just dug yourself deeper into a pit.

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RonJohn
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    This. If it were me, I'd do it. You can hedge loss of job by not letting the CC balance go over the amount of the last paycheck you'll receive, or just not worry about that if you know you can quickly find a new job. The way I see it, yeah, it's only, a couple of hundred bucks, but it's virtually free money with very little risk, so why not grab it? Heck, I once took out a $30K loan and paid interest on it for a couple of weeks just so I had something to pay off with a 0%/0% balance transfer offer on a new CC. Then dumped the money in savings for 18 months and profited $800. :) – TTT Feb 04 '20 at 19:23
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A quick and rough calculation yields:

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I know I omitted the minimum payment on the CC, this shouldn't really change the point of my post though.

Others already pointed out the potential risks of maxing out the credit card, figure out for yourself if the potential savings outweigh the risk.

I'm all for getting debt-free quickly, however do not forget to set aside at least 1 months' salary for emergencies like car repairs etc..

idkfa
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    I really appreciate the visualization in this comment. The consensus here has been the same and I will not be going through with the original idea. Also good to note that saving $200 doesn't even reduce the number of months it'll take to pay off. Definitely not worth it. – el toro Feb 06 '20 at 14:37
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Try making budget items with that $400 you spend each month and don't spend more than that. Once you subtract that from your $3330, you have $2930 to put towards lowering your $72,500. In about 25 months, you'll have your student debt paid off if you stick to that budget. Anything extra you make or bring in as cash, you can dump on the debt making that time shorter to pay it off.

It makes more sense to pay your take-home cash on your one and only debt before potentially making new debt with a credit card. The card bonus is not worth the extra work for a minimal return in rewards.

brandobyte
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  • The 7% interest on the loan makes it a good amount longer than 25 months. Like I said, it increases $400 every month (currently) after my $2930 payment, so I lose a lot of value. – el toro Feb 04 '20 at 16:32
  • @eltoro at $2900/month your $72k debt at 7% interest will be paid off in 27 months, without any credit card shenanigans. If you increased your payments by $400/month over the entire remaining life of the loan, you would drop that to 24 months, and save about $700 in interest, total. Given the risks of the 0% interest credit card, its not worth it, IMO. – asgallant Feb 04 '20 at 17:35
  • Your $2930 payment would go directly to the principle on the loan, making your total loan amount smaller, thus making the amount of interest smaller over time. This would be much faster at reducing your debt than trying to load portions of it on new debt and then paying that down. It might add a few months more because of interest, but an additional $2930 is knocking the principal down that much every month. That is down $35,160 in the first 12 months of paying it. Seems pretty awesome amount to reduce in just a year with cash. – brandobyte Feb 04 '20 at 18:28
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In addition to others answers: please note that those 0% APR promos most often come with transaction fees (from Chase I would expect something ~3%, paid immediately). So, after counting in the fee, the APR would be 4% rather than 7%. It makes the whole idea less attractive IMHO (if feasible at all). And one need to make sure that the card completely paid off before promo ends to avoid paying regular CC APR.

SolutionMill
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