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If the interest on your car loan is getting you down, you may have the option of transferring your debt to a credit card with a 0% introductory APR, thereby saving you money. However, there are also risks involved with switching your remaining balance to a credit card. Here’s how to do it, as well as the pros and cons of moving your debt over.
How to pay off a car loan with a credit card
When paying off a car loan with a credit card, you are essentially conducting a balance transfer — moving debt from one place to another to take advantage of a lower interest rate. When you use your credit card to pay off your car loan, you are closing the loan account and taking on the balance as credit card debt instead.
“If you can pay off your loan directly with a credit card, you'd avoid a transfer fee, but many lenders don't take credit card payments.”
Start by talking to your auto loan servicer to see whether you can pay off the loan directly with a credit card either online, in person or on the phone. Moving your balance this way would save you a balance transfer fee because it would be considered a purchase. Because credit card purchases impose fees on the merchant, many loan servicers allow only cash-backed payment methods, like a debit card, check, money order, or a direct transfer from a checking or savings account.
If you strike out with the servicer, you'll have to do a formal balance transfer to your card. You can usually initiate a balance transfer through your card issuer's online portal, or by calling the number on the back of your card. You'll need the name of the car loan servicer, the account number and the amount you want to transfer. The card issuer takes it from there. Another option is to use balance-transfer checks that your issuer may have sent you.
The amount you can transfer to your credit card is limited by your credit line, or may even be lower than your credit line. If you have a credit limit on your card of $5,000, for example, then you're not going to be able to move an entire $10,000 car loan balance.
When deciding whether to transfer your debt from one method (an auto loan) to another (a credit card), do the math on whether you will actually save money on interest, and do a gut check on whether you have the financial discipline to pay off your credit card before the introductory 0% APR period ends. If not, you'll start racking up high interest on your credit card. It may make more sense to reduce your payments by refinancing your auto loan instead.
The potential advantages
An interest-free period
Moving auto loan debt to a credit card with a 0% introductory APR will save you money on interest — assuming you pay off the loan before the 0% period ends. Credit card APRs are usually much higher than those on car loans, so be sure that you can erase the debt in time.
Ownership of your vehicle title
Paying off your auto loan in its entirety means you'll own your vehicle outright. Car loans are secured, meaning the lender can repossess the vehicle if you miss payments. Credit cards, by contrast, are unsecured. However, don’t use this as an excuse to default on your credit card; you would seriously damage your credit.
If you're able to pay off your loan directly with a credit card, you could earn cash back or rewards points.
A high transfer fee
Most credit cards charge a fee to transfer a balance — usually 3% to 5% of the amount transferred. So if you’re moving $10,000 in auto debt to a credit card, for example, you could end up paying a fee of $300 to $500. This could be more than what you'd save on interest, especially if you plan to pay off the balance fairly rapidly.
High interest if you don’t pay off the balance in time
If you're still carrying the bulk of the auto debt on your card when the 0% period runs out, you will likely end up paying much more in interest than you would have with your auto loan. Even if you feel good about your payment habits, an unexpected financial emergency could derail your budget, making it harder to erase a lot of debt in a short time. It's important to have an emergency fund, just in case.
A lower credit score
To keep a healthy credit score, it's best to use less than 30% of the total available credit line on your cards. Putting a big chunk of debt on a card can shave points off your score.
If taking the plunge on a full balance transfer seems like too big of a commitment, consider making the task more manageable. See if you can make your regular monthly payments with a credit card, then pay off your credit card right away. You could boost your credit with your responsible habits, and if you have a rewards credit card, you’ll earn cash back or points on your loan payments.