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The short answer is: it depends. Your credit score may be impacted by transferring a car loan to a credit card in both positive and negative ways.
Here’s the breakdown:
Potential benefits:
- Lower interest rate: If you can snag a 0% APR introductory period on a balance transfer card, you could save a significant amount of money on interest charges compared to your car loan’s interest rate.
- Reduced monthly payments: The lower interest rate could also translate to lower monthly payments, freeing up some cash flow for other expenses.
- Earn rewards: Some balance transfer cards offer rewards programs, so you could potentially earn points, miles, or cash back while paying off your car loan.
Potential drawbacks:
- Credit score impact: Transferring your car loan to a credit card can affect your credit score in several ways. Closing your car loan account could shorten your credit history, and adding a new balance to your credit card could increase your credit utilization ratio – both of which can negatively impact your score.
- Balance transfer fees: Most balance transfer cards charge a fee, typically around 3-5% of the transferred amount. This can add to the overall cost of transferring your loan.
- Higher APR after introductory period: Once the introductory period ends, your APR will jump to the card’s regular APR, which could be significantly higher than your car loan’s rate. If you haven’t paid off the balance by then, you could end up paying more in interest than you would have with your original car loan.
So, should you transfer your car loan to a credit card?
Here are some factors to consider:
- Your credit score: If your credit score is good or excellent, you’re more likely to qualify for a balance transfer card with a low introductory APR and favorable terms.
- The length of your introductory period: Make sure the introductory period is long enough for you to pay off the entire balance. Otherwise, you’ll be stuck with a high APR.
- The balance transfer fee: Consider the fee in relation to the potential interest savings.
- Your budget: Can you afford the higher monthly payments if you don’t pay off the balance during the introductory period?
Here are some additional tips:
- Do your research: Compare different balance transfer cards and choose the one with the best terms for your situation.
- Read the fine print: Make sure you understand all the fees and terms associated with the balance transfer.
- Pay off the balance as quickly as possible: This will help you avoid paying interest and maximize your savings.
The choice to convert your auto loan to a credit card is ultimately a personal one. Carefully consider the advantages and disadvantages before selecting the option that will work best for your budget.
Here are some additional resources that you may find helpful:
- Experian: Can I Get Out of a Car Loan Without Ruining My Credit?
- Bankrate: Should You Transfer a Car Loan To Credit Card?
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- Transferring your auto loan to a credit card with a 0% APR introductory period could help you save money on interest if you qualify and can afford the monthly payments.
- You might have to pay an APR that is higher than what you paid for your car loan if you are unable to pay off the whole loan balance during the introductory period.
- Before committing to this plan, calculate your eligibility, monthly payment, and potential savings. You should also confirm that your auto lender permits you to make this type of loan payment.
The average credit card annual percentage rate (APR) is almost 21%, which is significantly higher than the average interest rate on a car loan, so it makes financial sense to look for the lowest interest rate when taking out a loan. However, if a top rewards credit card offers a zero percent introductory annual percentage rate (APR), you might be persuaded to move a car loan to the credit card.
If you are eligible, you will benefit from a lower interest rate as well as potential rewards that can be redeemed for statement credits, cash back, or even a trip of a lifetime.
However, is it wise to move a car loan to a credit card? That depends on a number of things, including your ability to make loan payments during the introductory period.
How to calculate a credit card’s monthly payments
Determine the amount of your new payments before deciding to move your auto loan to a credit card.
Any balance transfer fees must be added to the entire loan amount in order to determine your monthly payments at zero percent interest. Then divide that total by the number of months your intro APR offer would last.
Alternatively, use Bankrate’s credit card balance transfer calculator to estimate your monthly payment and savings rather than performing the calculations by hand.
You will typically pay less each month than you would on the car loan if the introductory APR period on your credit card is equal to or longer than the remaining number of months on your loan. By extending the loan term through a balance transfer, you may be able to free up working capital for emergency expenses, high-interest savings accounts, or the repayment of debt with higher interest rates.
If your introductory period is shorter than the remaining car loan term, your monthly payment may grow instead. However, if your finances permit it, the additional cost might be justified by the total savings you would realize from avoiding interest.
Does paying off a car loan early hurt your credit?
FAQ
Can you switch a car loan to someone else?
Does it affect your credit if you give a car back?
How many points will a new car loan drop my credit score?
Does selling a financed car hurt your credit?
What happens if you transfer a car loan to another person?
Transferring a car loan to another person can temporarily lower your credit score, even if you haven’t missed any monthly payments. When you transfer a loan, you close a credit account, which can lower the average age of your accounts.
Does paying off a car loan early affect your credit score?
That’s because open accounts showing a good record of on-time payments have a powerful effect on your score. Closing an account also may reduce your credit mix and average age of accounts. Here’s what to know about how paying off a car loan early may affect your credit score.
Do car payments affect your credit score?
Current status: If you’re always on time with your car payments, your credit report will note that your car loan is “current” or “paid as agreed.” Because payment history has the biggest influence on scores, staying current on your payments could benefit your credit score significantly.
Can I transfer my car loan to a credit card?
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. Before you decide to transfer your car loan to a credit card, calculate how much your new payments will be.