If you’re mired in student debt — like 40 million Americans, according to CNN — receiving a balance transfer credit card offer in the mail may seem like a good omen. After all, if you can pay off even part of your loan at 0%, you’ll avoid the 4.66% rate on new undergraduate Stafford loans and the often-higher rates charged by private lenders.
But those savings aren’t assured until you’ve successfully paid off your balance. Many things can go wrong between the day you sign up for a balance transfer and the day you become debt free. Here are a few reasons to be cautious:
You may be ineligible for a balance transfer credit card
Before you can move your student debt to a zero balance transfer credit card, you need to qualify for the card. This may be difficult if you have a short credit history or have missed payments in the past. And even if you do qualify, not all lenders accept credit card payments. For example, you can pay federal loans with a credit card only if you’re in default. Private lenders’ policies vary.
You may not save as much as you think
It’s possible to find a free balance transfer, and some credit card companies are open to negotiation. However, you should expect to pay a few percentage points when you move your debt. This alone won’t erase your savings, but you should factor it into your budget.
You may miss the flexibility of student loans
Making a late payment on a credit card — or missing a month — is much worse than falling behind on student loans. For one, it could cause your interest rate to increase, leaving you with a higher payment than you had before your balance transfer. Student loan borrowers are also eligible for income-based repayment, tax incentives or loan forgiveness in some circumstances. Credit card users have none of these perks.
You may be committing fraud
Unlike student debt, credit card debt is dischargeable in bankruptcy. This may sound like a good reason to take a balance transfer credit card offer, but it’s not. Transferring your student debt to a card with the intent to file bankruptcy is fraud. And even if you perform a balance transfer with good intentions, but declare bankruptcy later, your lender might object.
The bottom line
That said, many people have used 0% APR balance transfer credit cards to pay off student debt. If you’re determined to take this path, make sure you’ve budgeted carefully, so that you’ll have paid off your balance in full — including any additional fees — by the time the introductory offer expires. And then stick to your budget! Consider automatic payments and be certain you can cover them on the date due. Overdraft fees will only eat into your savings — and make this risky proposition even worse.
College students image via Shutterstock.