Weighing the costs: Should you transfer a car loan to credit card?

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It makes financial sense to seek the lowest interest rate possible when borrowing money, right? You might be tempted to transfer a car loan to a credit card if you get a zero percent introductory APR for a top rewards credit card.

If you qualify, you’ll get a lower interest rate, plus rewards you can redeem for a dream vacation, cash back, or even a statement credit.

But is transferring a car loan to a credit card a smart choice? The answer depends on several factors – starting with how you initiate the transfer.

How to transfer a car loan to a credit card

If you can transfer your car loan to a credit card and then pay in full, you’ll get the intro APR without any balance transfer fees.

But some loan issuers only permit payments via check, cash, ACH direct transfer or money order. In that case, you can use the balance transfer checks that came with your new credit card.

You can also do a balance transfer direct from your car loan company to your credit card issuer. You’ll need to provide your issuer with your loan account number, the address where you’d mail payments and the name of the loan company. If you’re used to making online payments, it’s a good idea to call your loan provider to confirm this information.

When you use a balance transfer check or initiate the transfer through your credit card issuer, you could pay balance transfer fees.

Before you make the transfer, get answers to these questions:

• Will the creditor that holds your car loan permit you to use a credit card to pay the loan balance?
• If you can’t use your credit card, can you use a balance transfer check to pay the balance?
• Are there any penalties for paying the car loan early?
• How much will you pay in balance transfer fees?
• How long does the intro APR last?

How to calculate the credit card interest rate

Before you decide to transfer your car loan to a credit card, calculate how much your new payments will be.

To calculate your monthly payments at zero percent interest, just divide the amount left on your loan with the terms of your intro APR offer. If you have to pay a balance transfer fee, add that to the loan amount.

If you owe $5,000 on your car, with a three percent balance transfer fee, add $150 to the $5,000. Then divide $5,150 by 18 months, for example, if those are the terms of your intro APR. You’d pay $287 per month, which is most likely lower than any car loan that doesn’t carry a zero percent APR.

If you intend to own your car for several years, extending your loan by nine months to free up working capital to pay down higher interest debt, put in a high interest savings account, or even pay for emergency expenses can be a wise choice.

The impact on your credit score

Your credit score could suffer if you exchange a secure installment loan for unsecured, revolving credit. If you don’t have other installment loans in your profile, you are reducing your credit diversity. And if putting the balance of your vehicle loan on your card brings you closer to your credit limit, you will also reduce your credit score due to high credit utilization.

These are significant factors that make up your credit score, so if you are looking to secure a mortgage or another car loan within the next year, transferring your car loan may not be a wise financial choice.

If you already have another installment loan in your credit profile and the balance transfer doesn’t approach 30 percent of the available credit on your card, the effect on your credit score will be minimal and you can move ahead with the transfer.

Otherwise, you may consider other options, such as refinancing your car loan.

Getting an auto loan vs. getting a credit card

If you have poor-to-average credit, it’s easier to get an auto loan than a credit card. Car dealers will often make deals with banks to extend credit to customers with credit scores of 640 and below. Even if you have declared bankruptcy, you can find a car loan – but the interest rates will be high.

Similarly, you can get a secured credit card with a low credit score. But the best zero percent interest APR rewards credit card offers are typically extended to those with a credit score of 720 and above.

If your credit score was below 720 at the time you purchased your vehicle, but you’ve since qualified for a zero percent APR credit card, your payments will be less than your car loan for the duration of the zero percent offer. You’ll save on interest charges, too.

Pros and cons of transferring a high interest car loan to a low interest credit card

Pros

• You could save hundreds of dollars in interest over the life of the loan.

• You may reduce your monthly payments.

• You can earn credit card rewards with the new charge or balance transfer.

• The loan company will release the lien on your car and sign the title over to you.

Cons

• Your credit score may drop due to taking on more revolving debt and increasing your credit utilization ratio.

• If you miss a payment on the credit card, your APR could skyrocket.

• If you can’t pay off the balance transfer or new charge during the introductory period, your interest rate may be higher than it was on your vehicle loan.

Bottom line

If you do choose to transfer your car loan to a credit card with a low introductory interest rate, be sure to have a good understanding of your credit card company’s policy for doing so, as well as the requirements to get the introductory rate with no penalties.