Should I use my credit card to pay off my car loan?

So you have been paying down your car loan but now you just want to get rid of it. You may be thinking of paying off your car loan with your credit card and while this is possible with many lenders, you need to think about it carefully. It’s not a decision that will work for everyone. You have to think about the advantages and disadvantages before you do anything.

Essentially, when you pay off your car loan with a credit card, you’re making a balance transfer. Once the balance transfer has completed, you’ll be paying off your car loan under the terms of your credit card provider, not your car finance lender. You need to make sure that your credit card limit is enough to accommodate the balance transfer first.

Not everyone will be able to do this

If you got your car loan through a dealership initially then you may not be able to make the transfer because credit card payments have high merchant fees.

It may also be the case that the amount left on your loan is more than you have available on your card, or your credit rating isn’t high enough to meet the requirements. Ideally, you should talk to both your car finance provider and your credit card company to make sure you’re on the right track. It may be the case that you need to find a new credit card deal, so head to a comparison site to find the best credit cards for you.

The advantages of paying off your car loan with your credit card

1) You may get zero interest for up to 18 months

When you compare credit cards, you’ll see that lots of providers offer 12, 15 or even 18 months of zero per cent interest. If you have less than any of these periods left on your car loan, then you could make some big savings.

2) You’ll be able to maintain a good credit history

Your monthly payments may go down, which is great, but you’ll also keep up the good work of making your car loan repayments each month. Payment history accounts for around 35 per cent of your credit score, so when you keep making those payments on time, you’ll be maintaining and maybe improving your credit score.

3) You may collect lots of reward points

Lots of credit card providers have rewards programmes so that you keep on spending money with them. You may get money off flights, or a longer period of lower interest. Even if you just get a free coffee machine, it’s something!

4) How to make this balance transfer

You need to check if your car finance provider will let you do this and if they do, you can make the application. There may be a fee involved, so do the maths to make sure you’ll reap the benefits.

At the end of the term, make sure that your credit card company has paid off the car loan—just to be safe.

The disadvantages of paying off your car loan with your credit card

1) You need to have less than the interest-free period left on your car loan

This isn’t a disadvantage in itself, it’s basic maths. However, it can be frustrating to be stuck on your old car loan rates for a few months longer until you’ve paid enough off to make the balance transfer worthwhile.

2) You must pay off the loan before the zero interest period ends

If you don’t, you’ll find your credit card reverts to its usual interest rate. Credit cards tend to have higher interest rates than car loans, so you need to make every effort to make sure there’s nothing left on that balance by the end of the promotional period.

3) You’ve changed your loan to an unsecured debt

Secured debts are more respected than unsecured debts because you’re flashing your assets (in this case, the portion of the car that you own) to lenders. Lenders like to see secured debts rather than unsecured.

However, when you transfer your car loan balance to a credit card, you’re changing to unsecured and this “downgrade” will stay on your credit file for two years or more.

4) You might breach the 30 per cent rule

Those in the know (in a fiscal sense), advise us that we shouldn’t use more than 30 per cent of our credit limit. If you have a $1,000 credit limit on a card, try to keep the balance below $300, for example.

When you shift from a car loan to a credit card, you’ll almost certainly go over that 30 per cent Rubicon. If this move takes up 80 per cent or so of your limit, you need to reduce it as quickly as possible or even wait a few more months as it will affect your credit score.

5) You may be penalised by your car loan provider

Your car loan provider makes its money through the interest that you pay alongside your principal. It’s fair enough, then, that they might not want you to end the agreement before they’ve had their fill. You may, as a result, face penalty fees.

Very often, you’ll have to pay the equivalent of two months’ instalments and possibly the equivalent of the balance transfer fee (usually five per cent of your existing balance). You can either grit your teeth and pay it if it works out for you, or wait a while.

6) Missing credit card payments is more serious

As credit cards are unsecured, lenders use harsher methods to keep you in line. If you miss a payment, or even if you’re late, you’ll almost certainly have to pay a fee.

Missing a second payment will probably mean you’re reported to the credit reporting agencies, which is bad news. Car loan lenders can be more sympathetic and flexible because, ultimately, if you default and make no more payments, they can repossess the car.

7) Weighing the options up

You need to balance the savings you’ll make by using your card’s interest free period against losing credit score points and suddenly having an unsecured debt that’s more than 30 per cent of your limit. If the numbers work out and your score is buoyant, it could free up money that you could put to better use.

Compare credit cards from all of Australia’s major banks and credit card issuers here and compare credit card balance transfer deals here.

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