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Should I Use A Credit Card To Pay Off My Car Loan?

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Should I Use A Credit Card To Pay Off My Car Loan?

Paying off your car is a pretty big accomplishment – having the title in your hand and knowing that you own your vehicle free and clear can definitely make you feel a little lighter. This is why many of us go to great lengths to repay their car loans as soon as possible.

One way that some people go about paying off their auto debts is to pay off the loan balance with a credit card, then do a balance transfer of the loan to a 0% interest credit card. This way, the car loan is paid in full and they won’t have to pay an interest on the debt as they work to eliminate it.

This plan seems like a win-win, but should you try it for yourself? Be sure to read over the information below before deciding what’s right for you.

The unsecured vehicle

The first thing that’s important to understand is what you’re actually doing when you use a credit card to pay off a car loan. Simply put, you’re using an unsecured loan (the credit card) to repay a secured loan (the auto loan). If you’re not sure what this means, think of it this way: secured debts have some type of collateral that back them, like a car or a home. If you don’t make payments on these loans, the collateral could be taken by the lender. Unsecured debts – like credit cards and student loans – don’t have any type of collateral attached to them.

This means that by paying off a car loan with a credit card, you’re eliminating the possibility of having your car repossessed. However, keep in mind that your credit could be affected by this move. This is because if you’re paying off a car loan with a credit card, you’re probably going to be putting a pretty huge balance onto the card while at the same time close out the auto loan. It’s likely that this will significantly bump up your total credit utilization, which will ding your credit score.

» MORE: How to pay off debt

Lower rates – for now

One of the main reasons that people are attracted to the idea of using a 0% card to pay of their car loans is that they’ll be able to repay the debt without incurring any interest charges. If the rate you’re paying on your auto loan is high, you could end up saving big bucks by moving the balance to a 0% card.

But again, this strategy could very easily blow up in your face. Balance transfers aren’t interest-free forever, and over 30% of people who do balance transfers don’t repay the loan before the 0% period is up. If you move your car loan to a 0% card and can’t repay it before the interest-free window closes (usually 12-18 months), you could end up paying a much higher rate on your car debt than if you had just stuck with the auto loan in the first place.

Finally, be aware that many 0% cards require you to have good or excellent credit to qualify.

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Moving debts could mean big problems

Aside from some of the big pitfalls that come with transferring your car loan onto a credit card, if you’re considering this move it’s important to take a step back and reassess your financial situation. When people think about paying off loans with other loans, it’s usually a sign that they’re scraping around for cash that they don’t have.

If this sounds like you, forget about moving balances around and start taking steps to improve your financial standing. For instance:

  • Make a budget and stick to it – this way, repaying your debts will be easier
  • Track your spending – your budget will be most effective if you know where your money is going
  • Pay more than the minimums on your loans and credit card bills – this will get you to debt-free faster

The takeaway: paying off your car loan with a credit card might seem like a good idea, but given the risks involved, it’s probably not a worthwhile move. Instead, work on improving your financial situation so that you don’t have to deal with debt in the first place!

Car-buying image via Shutterstock