Debt management: 0% CC APR for 15 months vs 7% student loan debt

Question

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.

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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.

Answer 5

A quick and rough calculation yields:

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..

Answer 6

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.

Answer 7

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.