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.

  • 3
    It's rare (used to be common) to get actual 0% offers. These days, there's almost always some sort of initial fee for the loan, THEN 0% interest. Read the fine print for an origination fee. – James Moore Jul 30 '14 at 16:38
  • I was actually just writing a comment about that - there's a 3% fee on the amount taken out. – Mitch Jul 30 '14 at 16:39
  • 1
    Also, give some weight to the actual dollar amounts involved, not just percentages. Say your loan rate is 5%, then you're talking about a total dollar amount of 4000*.05*8/12 = $133. I'm guessing there's not $133 worth of hassle here. (And given that there's an initial fee of 3%, this becomes a no-brainer; the amounts are too small to care about.) – James Moore Jul 30 '14 at 16:46
  • 1
    Also, keep in might that there might be situations where you need money fast. A car accident, medical problems, a water pipe in your apartment that breaks and damages your furniture and appliances - name your emergency. In this kind of situation, it's much better to have a 100K student loan and a 4K credit card to get cash from, than a 96K student loan and maxed credit on the card. – Guntram Blohm Jul 30 '14 at 17:39
  • "Good" balance transfer (BT) fees are 2% these days. If you end up doing this - and I'm not saying you should - you should try to find a better offer. – mwp Jul 31 '14 at 15:08

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.

  • For that last section, is it for maxing out total credit or maxing out credit on a particular card? I have two other cards as well, with $0 balances. If I maxed the Citi card I'd still be < 50% total available credit – Mitch Jul 30 '14 at 14:11
  • As I understand it -- and I gladly yield here to anyone who knows more about how credit ratings work -- it is a minus on your credit score if any individual card goes above 50%. I had a negative on a credit report recently because my card with the smallest credit limit was over 50%, even though I have three other cards with much higher limits that were all well below, two at 0% and one at about 10%. I think it's a small minus -- not like missing payments or declaring bankruptcy -- but a minus. It didn't prevent me refinancing my mortgage or getting a car loan. – Jay Jul 30 '14 at 14:22
  • @PeteBelford I've already blown the money on the big screen TV; it's a sunk cost at this point ;) – Mitch Jul 30 '14 at 16:35
  • As a note regarding credit score, I had to max out two credit cards totalling $2200 due to an emergency. I've so far repaid one down to 10% and the other's at 90%, it hasn't made any significant dent (maybe a few points?) in my credit score over the past 3 months. Though mileage will vary from person to person. – user17781 Jul 30 '14 at 16:43
  • @Thebluefish I don't know how much it hurts precisely. What I know is that on my credit report there was a section listing things that brought my credit score down, and one of them was having high balances on credit cards. It didn't say how many points that cost me. I suppose I could get a good estimate if I dug out older credit reports and compared the scores ... but I don't know what other factors might also come into play and how many points each is worth. – Jay Oct 2 '14 at 13:33

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, good point about the transfer fee. When the OP said 0% interest, I was assuming he meant that there was also no transfer fee. If there is a transfer fee, then depending on what the interest is on the student loan, yeah, any savings would pretty much be eaten up. But that said, I've gotten lots of offers for cash advances with 0% transfer fee and 0% interest for 6 months or a year or so. Why would the banks give out free money? Partly to get people using the card, and partly because they know many people will not pay the money off by the end of the grace period. – Jay Jul 30 '14 at 14:26
  • 1
    Agree @Jay. I think most start out with good intentions, and they either use the card, or do not keep up with the monthly payoff payments. Then they end up with like $3000 at 18% interest. Even still, saving $80 over 7 months on a 100K loan? Does that really move the needle? When you factor in risk, does that sound like a good idea? – Pete B. Jul 30 '14 at 15:16
  • I agree. He didn't give the interest rate on the student loan so I didn't do the math, but you're right, the biggest-savings scenario I can see is if the student loan is 8% and you figure the savings over 8 months, $4000 * .08 * 8/12 = $213. A modest savings given all the risks of screwing up. If the interest on the credit card is 18% and the student loan is 6% -- fairly typical numbers -- then if you fail to pay off the card on time, 8 months of savings on the student loan will be eaten up by 3 months of credit card interest. That's why I've never done this. Too risky. – Jay Jul 30 '14 at 16:01
  • 1
    After looking through the comments I've decided not to do it. There is a transfer fee (3%). Based on the rough calculations you did there (though where did you get the $580?) I figure $20 over the course of 8 months isn't worth it. – Mitch Jul 30 '14 at 16:38
  • The 580 came from amortizing a $4000 loan of 7 months. I should have done 8, but you get the picture. There are many loan calculators you can use online, or there are many free apps for your smart phone. Good choice in not going for this. – Pete B. Jul 31 '14 at 13:17

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.

  • Nit-picking a bit here, but a balance transfer (BT) is not a cash advance, even if you use the provided BT checks to get cash. The difference in the ultimate (post-promotional) interest rates are significant enough that it's important not to equate the two. – mwp Jul 31 '14 at 15:07

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.

  • 2
    "Every percentage point of mortgage interest can mean the difference between a million USD home and a $750,000 one." Personally my dilemma is more between the $5 cardboard box under a bridge and the lean-to built with $20 worth of plywood and canvass. But whatever. – Jay Jul 30 '14 at 18:33

Your Answer

