Education loan Interest Rate in India is around 12% or even higher. Is it a good idea to pay off education loan from your home country ( say India) using 0% Balance Transfer offer from U.S. Credit Cards?
- Your Goal : Save on your interest rate of your education loan
- Analysis : Pros and cons of borrowing money to pay off a loan
Below are my thoughts on student loan interest rates (borrowed in India), and how you can save money by using balance transfer offers provided by many popular credit card companies based in U.S.A.
Education Loan and Credit Card Balance Transfer : Background
Interest rates on my educational loan (borrowed back in India) have always been greater than 12% per year, steadily increasing to 14.5%.
When the money was borrowed originally, interest was at ~48 Rs per dollar. After I began to replay my loan, the Indian Rupees (INR) depreciated to ~58 Rs per dollar! (If it remained at that level, I’d have to repay more dollars).
This factor, in addition to my urge to be debt free as quickly as possible, made me look at the balance transfer offers I often received from two credit cards companies here in U.S.A.
I have used many balance transfer offers over a period of 4 years with 0% APR and a 3% transaction fee (now some offers come with up to a 5% transaction fee).
The 0% APR periods have always ranged from 15 to 21 months.
So the actual interest per year (including the transaction fee) for the balance transfer offer for the credit card was much lower than 3%, and in comparison. That’s much better than the 14% I was paying back in India.
Using up the balance transfer offer was also a guaranteed way of getting the current forex prices. Fortunately for me, INR was depreciating (more rupees per dollar) during the time I started using the balance transfer offers.
E.g., If you borrow money using balance transfer and immediately transfer it (within one week/month) to India at INR of 63 Rs per dollar you can save ~5% in forex rates itself (if exchange rate is INR 59.85 per dollar)!
Instead of sending X amount every month to pay my loan, I’d borrow 10 times the amount through the balance transfer, send it to India, and start repaying the my credit card balance offer a few months in advance.
[alert type=”info”] Balance transfers are awesome, if you do your homework. I Repeat : Balance transfers are awesome, if you do your homework. Be aware of potential risks before you do this. . [/alert]
After testing out my technique and being successful, I would like to share how you can save money paying back your student loans in India.
Step 1: How to do Balance Transfer
If you are using a balance transfer offer on your current credit card, make sure to pay off all of your current balances.
Wait for a statement with zero balance and then use the balance transfer offer (max it out or use part of it). You have to do this if you want to be safe from shocking interest charges.
- Credit Card Limit : $10,000
- Current Balance : $1,000
- You use a balance transfer : $8,000
- Transaction Fee 3% : $240 ( 3% of $8,000)
- Total New Balance : $9,240
Here’s the catch :
Your promotional 0% APR applies only to that $8,240
For that existing $1,000 balance, your regular APR applies which can be anywhere between 12% to greater 30% (depending on your card agreement).
Here’s the tricky part :
- Any monthly payment you make goes towards the amount that has a lower APR.
So, until you pay off your $8,240 from the balance transfer, you are going to get charged the regular APR every month on that $1,000 (this adds up very fast!), and that charge adds to the higher APR balance every month.
- The same holds true if you purchase anything after utilizing balance transfer (unless it’s a new card and has a 0% APR on purchases for the first few months).
As a best practice, I did the following :
- Pay off existing balance.
- Wait for a credit card statement to show balance of Zero.
- Do the Balance Transfer
- Lock the card in a safe place until I am done paying off the balance on it.
Step 2 : Pay Monthly Credit Card Balance
Pay your balance off before the 0% APR period your balance transfer ends. Because, as you may guess, the full APR rate will apply to the balance after this period.
An easy way to remember this is to set a Google Calendar reminder that will email you a reminder before the last date of your offer period.
I’d usually start saving up for the big pay off a few months before the last offer date.
Step 3: No Late Payments on Credit Cards
If you are late on even one payment, which means paying the minimum amount after the due date for that statement period, the credit card company will most likely revoke your 0% APR and make it regular APR.
[alert type=”danger”] DON’T EVER BE LATE on any of your payments, especially the ones where you have used the offer. [/alert]
Step 4: Credit Score and History
Your credit history will certainly take a minor hit, but it’s not too big to be worried about (I have previously tracked it; dropped from 730 to 720/710).
If my understanding of credit scores is correct, it’ll end up boosting your scores and credit history once you have paid the balance off without a single late payment.
Other Balance Transfer Tips
- If you are planning to apply for any type of a loan (auto/education/home), it is suggested to not have a large rollover balance (That’s the remaining balance on your card after you have paid the minimum due on or before the due date).
- If you struggle at being disciplined when paying off balances or credit cards, don’t use the balance transfer offers. You’ll end up digging a bigger hole for yourself.
- The USA is a country with very cheap credit, use it. But don’t be careless while using it. It’ll come back to bite you hard, really hard.
- ***Low interest credit is awesome. Use it responsibly***
- Disclosure: I have been an engineer all my life (I mean, after 12th grade :)) and not a financial advisor. This article is written with the goal of sharing my experience, and is not vetted by a finance person for its accuracy or effectiveness. Anyone reading this should not take this as a financial advice. If you need one, please go to a Certified Financial Planner (who takes a flat fee).
Will You do Balance Transfer
Student loans can make life difficult. The ones borrowed in India are even more complicated.
If you are an international student in the USA and not from India, this article will still benefit you if your student loan interest rates are high and the forex rates for your currency are highly volatile.
I hope you can find this information helpful to your current monetary situation.
Written by Nitin ( iOS developer in Washing DC Area and HSB Fan).
Over to You
What do you think about using balance transfer to pay off your high interest education loan in India or your home country?
Let me know your thoughts about balance transfer?
My room mates back in UTA used to do balance transfer to save on interest rates. You know all is well sometimes doesn’t end well.
It’s tough to recover from Credit History mess.
Have you heard about Murphy’s Law?
See this Interstellar Trailer (around 30 seconds )
You can plan everything to perfection, but things can go out of control and you may end up paying more more than what you have planned for, plus not to mention about Credit Score and history impacts.
Have you done anything like this with Balance Transfer? Let me know your comments and concerns in the comments below.