Ask the Expert: Should I Move My Auto Loan Debt to a Credit Card?

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Temperatures are rising, beach vacations are being planned, and the urge to drop the top on your car is overwhelming. But wait—you don’t own a convertible. That’s the bad news. The good news? We’re about to enter the beginning of car buying season and a ragtop might just make it on your list of options.

If you’ve got great credit, you will easily find a car loan in the sub-five percent range.  Some captive auto lenders are going as low as 0% on select makes and models. If you can’t get 0% from a captive auto lender, then you have another option for free auto loan money: your credit card.

That’s right. Some credit card issuers allow you to transfer the balance due on your auto loan to your credit card. And, if you’ve got good enough credit, then you could take advantage of the best deal going with credit cards right now: free money in the form of a 0% introductory interest rate. Still, is transferring auto loan debt to a credit card a good idea or not?

Installment to Revolving

If you’ve done your homework regarding credit scores, then you know installment debt is much less predictive of elevated credit risk than revolving debt. Translation? Installment debt is less problematic for your credit scores than revolving debt. When you move a balance from your auto loan to a credit card you have immediately converted almost benign installment debt to potentially damaging revolving debt.

Further, if you’ve added a large amount of auto loan debt to a credit card, then you may be left with a heavily leveraged credit card. Remember, one of the most important factors in your credit scores is the relationship between your credit card balances and your credit card limits. If you add $10,000 of auto loan debt to a credit card with a $10,000 credit limit then you now have a 100% “utilized” credit card on your credit report card and your scores are sure to take a hit as a result.

Unnecessary Risk

Zero percent interest credit cards are great, but the no-interest period is limited to usually no more than 18 months, and that’s on the liberal end. Many no-interest periods expire after only a few months. If you haven’t paid off the card by the time the no-interest period expires then you’ll have to start paying interest on the debt. And, the average interest rate on a credit card is around 15%. In fact, you’ll likely be paying considerably more interest on your auto loan debt than when it was actually auto loan debt rather than credit card debt.

You may also be asked to pay a balance transfer fee.  Balance transfer fees are normally around 3%, but can vary from card issuer to card issuer. If you’re considering moving your auto loan debt to a credit card you should be cognizant of the cost to move the debt relative to your savings and see if the tradeoff is still in your favor. This is especially true if your loan is close to being paid off and the amount of interest still due is minimal.

Still, an argument can be made that by moving your auto loan debt to a credit card you all but eliminate the possibility that your car will be repossessed if you fall on hard times. That seems like a potentially expensive quasi-insurance policy against repossession. Plus, if your credit reports are already showing evidence of hard times, then it’s unlikely you’ll qualify for a no-interest credit card as the issuers of those cards demand pristine credit scores.

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John Ulzheimer
John Ulzheimer, Credit Expert for Credit Sesame, is a nationally recognized expert on credit reporting, credit scoring and identity theft. He is twice FCRA certified by the credit industry’s trade association and has been an expert witness in over 170 credit related cases to date. Since 2004 John has been interviewed and published over 3,000 times on the topics of personal finance and consumer credit.

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