0

I currently have a student loan that charges me interests every 1st of each month. The interest rate is about 3.5 to 5.5%. Can I use my credit card to pay off an amount of the loan at date of 25th for example, and then, once the 1st has passed, I retake money from my loan and repay my credit card (for example on the 5th) to save interests ? (and since I pay my credit card before having interests)

I ask because it doesn't make sense to me that the bank hasn't thought of that, therefore, I'm sure I must be in the wrong here.

Aditionnal info: I live in Canada

8

Your plan misunderstands how interest is most likely calculated. It will be calculated on the average daily balance over the period (month). So if you start with $10k on the 1st, pay off $3k with your credit card on the 25th and "take out" the $3k to pay back the card (if you can even do that), your average daily balance will be (assuming a 30-day month):

25/30 * 10,000 + 5/30 * 7,000 = 9,500

So you'll be paying interest on 9,500 instead of 10,000. If your interest rate is 5.5% (the high end of your range), you'll pay interest of 43.54 instead of 45.83. Seems like a lot to go through for $2 in interest savings.

Plus, many loan servicers will charge you a 2-3% fee for using a credit card as payment (since they're passing on the merchant fee to you), so you may pay $90 just for using your credit card.

All in all, this is not a wise plan.

  • 2
    Some banks may also charge a daily interest rate on a card transaction that equates to cash, which really boosts the effective monthly/annual interest rate. – fred_dot_u Aug 8 at 19:36
  • Alternatively, the bank could just calculate interest every day. This doesn't normally provide additional money to the bank (they'll use whatever rate matches their advertised APR, rather than a simple multiplication). – Brian Aug 8 at 20:17
  • 1
    The charge on the CC would carry over longer than you think based on how CC billing cycles work. Charge on 01/25, billing cycle ends on 02/20. Bill is delivered on 03/01 and must be paid by 03/09. All of this occurs without an interest charge. So long as the CC does not see the transaction as a cash advance (different set of fees), CC is not carrying a balance, and the loan doesn't charge fees for taking money out, then you get by without paying interest for 1.5 months. It does work, but as you said, not in the way that OP thinks it does.. – Shorlan Aug 8 at 21:05
  • 2
    @shorlan well you're deferring interest 1.5 months. You're eventually going to pay almost all of the interest on the loan, even if you float it on the card. Still, it's a dangerous game to play. Picking up pennies in front of a steamroller. – D Stanley Aug 8 at 22:02
  • Thanks a lot for the answer, it makes sense and that's why I was hesitant to do it. I knew the bank must have already thought of that. – luisarcher Aug 9 at 14:48
4

This won't work.

Note I'm assuming your student loan works like a line of credit (because the question wouldn't make sense otherwise).

The deal breakers are:

  1. Most lenders will not allow you to make loan payments with a credit card. If they did, it would cost them at least a 2-3% fee per payment and they would very likely pass this fee on to you. Those fees would cost you at least 24% interest annually.
  2. You could pay with a credit card by using the cash advance feature, but when you do this you do not get a grace period and so you pay the higher CC interest from day one. Presumably your student loan interest rate is already lower than the CC cash advance rate.

Ask your lender if they will allow you to make payments with a credit card, and if they charge a fee to do so. If they allow it without a fee, update your question and we'll take it from there. (And I'll be shocked that they allow it, but I think in that case your idea would work.)

  • 1
    Worst case, the lender takes the fee AND the credit card issuer considers it as a cash advance (yes, that happens). – jcaron Aug 9 at 16:13

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.