Playing Your Cards Right: Avoiding the debt zombie apocalypse

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Households with credit card debt are spending more than households without credit card debt in seven of the nine discretionary spending categories that our sister site, CreditCards.com recently asked about. This is a really big problem because the average credit card charges a record-high 17.86 percent. If you have credit card debt, you’re essentially spending 18 percent more for everything you buy.

I want to highlight that these are discretionary purchases – not housing and groceries. And they’re big line items, which is important because I’m not into the whole latte-shaming thing. If you’re in debt, it’s probably not because of small luxuries. A $425 monthly car payment is much more likely to be the culprit. That’s about $5,100 a year.

Or if it’s not the car payment, maybe it’s leisure travel or dining out. The average household with credit card debt that spends on leisure travel runs up an annual bill of $2,211, and dining/takeout is close behind ($2,186).

There’s also clothing/shoes/accessories ($1,892), cell phone services/upgrades ($1,629), out-of-home entertainment ($1,538), fitness ($1,385), subscription services ($1,198) and personal care/beauty ($1,146).

Remember, these expenditures are optional! Even the car payment. You might need a car to get to work and elsewhere, but you don’t need a brand-new car. The average new car costs $37,577, according to Kelley Blue Book. On average, $31,099 of that is financed, Experian reports, for 69 months. That’s almost six years of $500+ monthly payments and a big reason why so many households are in debt.

Buying a cheaper used car or holding onto your existing car a bit longer would save a ton of money. You could also opt for public transportation or ridesharing services such as Uber and Lyft. And note, these car payment figures I’m quoting are just for the loan. They don’t even include insurance, gas and maintenance, which would conservatively add a few thousand dollars to the annual total.

Lifestyle creep is to blame

A different CreditCards.com survey found that, among those with credit card debt, 56 percent have been in debt for at least a year and 37 percent have been in debt for at least two years. More than a third of credit card debtors blamed emergency expenses for landing them in debt, and 28 percent pointed to day-to-day costs. However, many people are blurring the line between necessary and discretionary.

In all nine categories, the CreditCards.com data found fewer than half of respondents would be willing to significantly trim their spending in order to save money. Yikes!

I don’t mean to sound like you can’t have any fun. I just think there are plenty of ways to have fun that don’t end up costing you an arm and a leg. The Federal Reserve says the average household with credit card debt owes $5,700. If you only make minimum payments at 17.86 percent, you’ll be in debt for 19 ½ years and you’ll end up paying $7,526 in interest. That’s a recipe for financial disaster. How can you save for retirement, college tuitions and other priorities if you’re living like that?

The median household credit card debt is $2,300. It could potentially be retired in one year if the family opted for a staycation rather than a big trip. Even cutting your annual dining out bill in half would make a huge dent. So, turn a restaurant visit into a special treat rather than a weekly (or in some cases, daily) habit. Pro tip: bring your lunch to work for one week and see how much money you save.

Other ways to get out of credit card debt

Besides raising your income (through a side hustle, perhaps) and cutting your expenses, take advantage of balance transfer credit cards. These allow you to move a high-rate credit card balance to a new card with a 0 percent interest rate for up to 21 months.

Refrain from making new purchases on this card. Divide how much you owe by the number of months in your no-interest promotion and stick to that monthly payment schedule. You’ll knock out the average $5,700 debt with 21 payments of $271 and change. Beware of transfer fees – that 21-month offer (the Citi Simplicity® Card) charges a 5 percent transfer fee. Most balance transfer cards charge a transfer fee ranging from 3 to 5 percent.

The longest 0 percent period without a transfer fee is 15 months (available on the Chase Slate, the BankAmericard® credit card and the Amex EveryDay® Credit Card from American Express). In all three instances, you need to transfer the balance within 60 days of opening the account to get the transfer fee waived.

I’m confident that everyone can get out of credit card debt – usually in no more than a year or two – if they sign up for a balance transfer card and make lifestyle modifications such as earning more or spending less.

More from Ted:

Ted Rossman is the industry analyst and columnist at Bankrate.com and CreditCards.com. He has been interviewed by hundreds of media outlets, including the Wall Street Journal, Forbes, NBC Nightly News, CBS News, CNBC and Fox Business. Ted also writes the “Wealth and Wants” column for CreditCards.com, which focuses on cash back cards. He previously spent seven years as a member of the award-winning communications department at CreditCards.com and its sister sites, The Points Guy and Bankrate.

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.

Auto Loan Refinancing - When to Refinance Your Car Loan

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When you’ve gone through the effort of getting a car loan, it can be tempting to simply pay it off and never look back. Before you engage the cruise control, though, consider the potential benefits of a refinancing an auto loan.

People typically refinance an auto loan because they’ve found a better interest rate, which would result in them saving money. But there are other situations when refinancing would make sense. The key is keeping an eye out for any of the five following situations and being prepared to act.

• Situation 1: You see interest rates dropping. Interest rates on all sorts of consumer loans periodically rise or fall, influenced largely by the monetary policies of the Federal Reserve. The Fed has raised interest rates three times in 2018, but history shows that reductions will eventually come around. When they do, be ready to look for your opening.
• Situation 2: You want to improve on a “dealer-sourced” loan. If you financed your car through the dealership, you likely got a higher interest rate than you could have thanks to something called a dealer markup. A dealer’s preferred lenders commonly charge higher rates, and part of difference goes back to the dealership. Compare your current loan with offers from other sources (your bank or credit union, an online lender, etc.) to see if you can get a lower interest rate with a refinance car loan.
• Situation 3: Your credit score has improved. All those months of diligently paying off your current loan can have a positive effect on your overall creditworthiness. Lenders typically see a good credit score as a sign of a less risky borrower, which in turn can lead to offering better interest rates. If your credit score has improved since you took out the loan, you might be able to save money on interest through a refinance. You can check your credit for free on Bankrate.
• Situation 4: You want to buy the car you’re currently leasing. Car leases typically include an option to buy at the end of the lease. You can get a refinance loan to buy the car outright when your lease expires, although this approach has its pros and cons. If you want to save money on a lease-to-purchase, you’ll need to make sure that the total cost of buying the car, including interest on your refinance auto loan, would be lower than extending the lease or leasing a different car.
• Situation 5. You need lower monthly payments. Sometimes refinancing a car loan is a life preserver, not a windfall. If you run into financial trouble and want to reduce your car payment, you could refinance a loan with a longer term (from 36 months to 48 months, for instance). Although you would pay less per month, expect to pay more total over the life of the longer loan.

How to track refinance interest rates

Most refinance opportunities involve taking advantage of a better interest rate. If you find an interest rate substantially lower than what you’re paying on your original loan, it could be time to get a new deal with a refinance car loan.

One easy way to keep an eye on interest rates is by checking the Bankrate auto loan lender marketplace, which includes current offers on refinance car loans.

Also, Bankrate’s Auto Refinance Calculator lets you compare your current loan with a new offer side-by-side. Just enter a few pieces of information, including your current monthly payment and the balance you owe, to see how much you could save by refinancing.

When is refinancing a bad idea?

In some cases, refinancing may not make good financial sense for either you or the potential lender. Those situations include:

• When you’re well into paying off your current loan. Through the amortization process, your interest charges gradually decrease over the life of the loan. As a result, a refinance has more potential to save money when you’re in the earlier stages of repaying the original loan.
• When you’re trying to refinance an older or high-mileage car. Most lenders won’t find it worthwhile to issue a loan on a car that has significantly depreciated in value.
• If you’re “upside-down” on the original loan. Lenders typically avoid refinancing if the borrower owes more than the car’s value (also known as being underwater).

Let smart shopping drive the decision to refinance

If you’re wondering how to refinance a car, the process isn’t that different from buying the car itself. You’ll want to shop around for a good deal and take a couple of test-drives (in this case, with the Auto Refinance Calculator).

If everything falls into place, you could be looking at a more financially comfortable ride.