If you’re currently making installment payments on a car loan, you may be considering putting the entire loan amount on a 0-percent annual percentage yield (APR) credit card to drastically reduce the amount of interest that you end up paying. While this can be a good idea that will save you money, it’s important to completely understand the benefits and the potential issues.
Advantages of Paying Your Car Loan with a Credit Card
The most obvious reason to pay your car loan with a 0-percent APR credit card is to pay less interest by cutting down on how long you have the loan. Another benefit is that you don’t need to worry about repossession of the car if you have any payment issues.
A car loan is a secured loan, which means it has collateral attached to it – in this case, the car. If you default, the lender can repossess the car. Credit card debt is unsecured, so if you don’t pay your credit card bill, the card issuer can’t repossess your car. It’s still much better for you if you pay, because it will harm your credit if you don’t.
The first thing to know about 0-percent APR credit cards is that the 0-percent APR I only an introductory rate. The introductory period usually lasts 12 months, although that depends on the credit card and some cards have introductory periods up to 18 months. If you don’t pay off your balance within that time, then you’ll need to pay interest on it. This makes it crucial that if you decide to pay your car loan with a credit card, you’re sure you’ll be able to pay off the balance before that introductory period ends. You’ll also need to have a good credit score to qualify for that 0-percent introductory rate.
Choosing to pay off your car loan this way can also negatively impact your credit score because of two factors that credit bureaus use to calculate your score – your credit utilization and your types of credit.
Your credit utilization is the amount of your available credit that you’re currently using. Credit bureaus weigh your credit card balances much more heavily than installment loans, such as car loans, for this. By paying your car loan with a credit card, you’ll increase your credit utilization. When your credit utilization is over 30 percent, it results in a lower credit score.
Another factor that goes into calculating your credit score is how many types of credit accounts you have. Having multiple types of credit accounts, such as a credit card and an installment loan, is better for your credit than having just one type of account open. When you pay off your car loan, you won’t have that type of account open anymore, which could lower your credit score. This doesn’t affect your credit score as much as your credit utilization, but it’s still something to consider.
Considering Your Financial Situation
Besides the potential problems with your credit score, one of the main issues with using a credit card to pay your car loan is that this is often a sign of poor financial habits. People who have mismanaged their money look for quick fixes, but solutions like this only treat the symptom, not the underlying problem.
If you’re spending beyond your means or aren’t making enough to handle your loan payments, transferring the debt isn’t going to help you with that. You’ll only be in debt on your credit card instead of with an installment loan, and that can be even worse, because a credit card is a revolving line of credit. As long as you haven’t hit your credit limit, you can continue spending money. At least with an installment loan, you’re unable to increase the debt and you if you make your payments every time, you’ll eventually pay off what you owe. With a credit card, you can just make the minimum payment every month and it could take you decades to pay off your debt.
If you’re thinking about transferring a debt to save money, you should first analyze your current financial habits. Create a budget and find out how much you’re making each month compared to how much you’re spending. Spending too much? Find areas where you can make cuts. Commit to paying a certain amount toward your outstanding debts every month, and make sure that you pay more than the minimum on your credit cards.
You’re Better Off Without Transferring Your Car Loan
In a very specific situation, you can save a bit of money on interest by paying off your car loan with a 0-percent APR credit card. But you need to be able to pay it off within the introductory period, and if you can do that, it’s better to just pay off the car loan without transferring it. You won’t take any hits on your credit score and by paying it off quickly, you still won’t pay that much interest.