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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

Some loan issuers only permit payments via check, cash, ACH direct transfer or money order. In that case, the only way forward is to use a balance transfer check (if your issuer provides them).

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.

However you decide to go about it, you may have to 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—and can you pay the loan off in full in that amount of time?

How to calculate a credit card’s monthly payments

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, divide the amount left on your loan by 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, avoiding interest entirely.

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

Transferring a car loan to a new credit card can impact two key credit score factors: your credit mix (which accounts for 10 percent of your score) and potentially your credit utilization ratio (which accounts for 35 percent of your score).

  • Credit mix refers to the different types of credit lines you have, like credit cards, student loans, mortgages, and auto loans. Having a diverse mix is a good thing, and if you eliminate the only installment loan on your profile, you are reducing your credit diversity.
  • Credit utilization ratio refers to the amount of credit you’re using compared to the total amount you have access to. 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.

Lastly, you’ll incur a hard inquiry on your credit report almost any time you apply for a new line of credit—balance transfer credit cards included—which will lower your score by a few points.

For these reasons, transferring your car loan may not be a wise choice if you are looking to secure a mortgage or another car loan within the next year. Instead, you might consider an option with fewer credit implications, like refinancing your auto loan. If you already have another installment loan (like a student loan or personal 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.

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 if you have a low credit score. But the best zero percent APR 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 car loan to a 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.

The 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.