Should you transfer a car loan to credit card?

It makes financial sense to seek the lowest interest rate possible when borrowing money, right? The average credit card APR is nearly 21 percent, far higher than the average car loan interest rate. But you might be tempted to transfer a car loan to a credit card if you get a zero percent introductory annual percentage rate (APR) for a top rewards credit card.

If you qualify, you’ll get a lower interest rate and you may earn 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 whether you can afford to pay off the loan during your introductory period, among other factors.

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 may 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. This means the auto loan company can no longer seize your vehicle if you fail to make payments.

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.
• If your 0 percent APR introductory period is shorter than your remaining car loan term, your monthly payment may be higher.

How to transfer a car loan to a credit card

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 prepayment 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?

A 0 percent intro APR period typically lasts between 12 and 21 months, after which you’ll start accruing interest on unpaid balances. And you may have a time limit to complete the balance transfers if you want the promotional interest rate applied — for example, four months after you gain card membership.

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 transfer a balance directly 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, which typically range from 3 to 5 percent of the total amount transferred.

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, add any balance transfer fee to the total loan amount. Then divide that total by the number of months your intro APR offer would last.

Or, instead of doing the math by hand, check out Bankrate’s credit card balance transfer calculator to preview your monthly payment and savings.

Generally, if your credit card’s introductory APR period is the same or longer than the number of months left on your car loan, you’ll pay less each month than you would on the car loan. Extending your loan period with the balance transfer could free up working capital to pay down higher-interest debt, put in a high-interest savings account or even pay for emergency expenses.

If your introductory period is shorter than the remaining car loan term, your monthly payment may grow instead. But if your budget allows it, the extra expense might be worth it for the overall savings you’d enjoy by not paying interest.

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 under the FICO model) and potentially your credit utilization ratio (which accounts for 30 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. Refinancing can have a temporary credit score impact, but it’s typically minimal.

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 and alternative lenders may extend credit to poor-credit customers with credit scores of 580 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 secured cards are not ideal for sizable balance transfers. Many don’t allow them, and for those that do, the amount you can transfer will be limited by the size of your cash security deposit. Lastly, they typically do not offer a 0 percent intro APR period.

You can find balance transfer cards for bad credit, but their interest rates aren’t often better than those for auto loans.

The best zero percent APR credit card offers are typically extended to those with a credit score of 720 and above. These cards may also come with cash-back rewards or other benefits.

Another factor worth considering: Auto loan repayment periods tend to be far longer than credit card introductory periods. Auto loan terms can exceed 84 months, while even the best introductory offers top out at 21 months. Auto loans’ longer repayment terms mean more time for interest to accumulate, but they also mean lower monthly payments.

However, your intro period may match or exceed your remaining auto loan term if you’ve already been making payments for a while. In that case, your monthly payment should go down.

So, if your credit score is healthy and the payments would work for your budget, balance transferring your auto loan to a credit card may be wise. If your credit health could use help, sticking with a car loan and working to improve your score is likely a better move.

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.