After reading the title of this article, you might be asking yourself, “What the heck does a credit card have to do with a car loan?” And your bewilderment comes with good reason because credit cards have traditionally been irrelevant to vehicle financing. Sure, they’re both grouped within the personal finance category and they can both get you into debt, but the connection generally ceases there. Now, however, certain credit cards actually provide a way for savvy consumers to significantly lower the cost of their car loans.
How? Through balance transfers. While most people believe that balance transfers only involve moving the balance held on one credit card to a second credit card that has a lower interest rate, the utility of this credit card maneuver is actually much more varied. Consumers can also transfer debt from any loan or line of credit to a credit card. If the interest rate on a credit card is lower than that of the original loan or credit line, then by transferring his or her balance, a consumer can save a significant amount of money on interest. Thus, a balance transfer can be extremely helpful for anyone that has high rates on their car loans.
This capability recently became even more useful as Citi began offering 0% interest credit cards with no interest on balance transfers for 15-24 months. Considering that 12 months is typically the longest 0% balance transfer offered, Citi’s cards have the potential to be particularly beneficial to debt laden consumers because they now have far longer than ever before to pay off a transferred balance before any interest is assessed.
While on the surface it might seem like a no brainer to transfer a balance to one of these cards, doing so is actually not advisable for all consumers. Before deciding to transfer your balance you must take interest rates, balance transfer fees and the amount of your remaining car loan balance into consideration. The Citi Platinum Select MasterCard offers 0% balance transfers for 24 months, yet charges consumers taking advantage of this feature fees equaling 3% of any balance transferred. Thus, this credit card has, in effect, a 1.5% interest rate for two years.
Still, is it feasible for you to pay down the remaining balance on your auto loan in two years? To determine this, simply divide your existing balance by twenty-four. The resulting figure represents a rough estimate of the monthly payment required to erase your debt before the 0% introductory rate concludes. If you will not be able to make these payments comfortably, you run the risk of having your credit card’s interest rates skyrocket, thereby defeating the whole purpose of a balance transfer.
Transferring your auto loan debt to a credit card also benefits you in the worst case scenario. Auto loans are secured; meaning that if a customer cannot make payments, his or her car could be repossessed. Credit card debt, however, is unsecured. So while you could eventually get sued for the amount of your debt after becoming seriously delinquent, your means of transportation will not be seized because of payment difficulties.
Ultimately, when deciding if you should transfer your balance, simply ask yourself whether your auto loan interest rate is over 1.5% and if you could comfortably pay off your existing balance over two years. If the answer to both of these questions is yes and you have excellent credit, transferring your auto loan debt to a credit card with a lower interest rate would be extremely beneficial. Besides, if something happens and you cannot make your payments, the consequences, while still not good, will be less severe if your debt is associated with a credit card account rather than a car loan. Thus, balance transfers should at least be considered because they are a very strategic way to lower costs and provide you with peace of mind.
This article was written by Odysseas Papadimitriou, CEO and Founder of CardHub.com, a website that helps consumers compare credit cards.