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To use a credit card to pay off a car loan is a crazy idea, but it may also be a form of pure genius. You’ve got a big balance available on your credit card, and with a balance transfer, you could pay off your auto loan in a hurry.
Does it make sense?
Credit cards are an example of revolving credit. Revolving credit was invented years ago for businesses to cover month-to-month expenses. A typical business used the funds to make monthly purchases and then paid the loan back in full which reset the balance at zero.
One day, the banks decided to offer revolving credit to individual consumers, and consumers liked it. Initially, they paid off the balance at the end of every month, but when consumers started to carry the balance forward, banks felt free to charge a higher interest rate. A credit card’s offerings are tempting. It’s essential to manage the credit card right.
How to Manage a Credit Card
If you want to put groceries on a credit card, you can, and there's some logic to doing that. After all, groceries are a monthly expense, and a credit card is quick. With this type of credit, the convenience can be hard to resist, but when poorly managed, the balance grows. Every consumer item imaginable becomes accessible, and the balance balloons. Unless you pay off the balance monthly, you are subject to high fees and interest rates. But how could this be, you ask? I signed up for a reasonable rate. Look at the agreement. Did you sign a document saying a credit card company can raise their rates whenever they want to? It’s hard to believe anybody would sign such an agreement, but many do.
Okay, fine. Everything is still cool. You can still manage a credit card. When you executed the balance transfer, you carried the balance from month to month regardless of the introductory rate. Okay, here’s where your management skills kick in. You didn’t sign up with just any old credit card. You signed up for one of those Zero-Interest-Introductory-Rate cards. You’re smart. You will pay zero interest rates for 12, 15 or 18 months after signing. You pay off the balance in that time, and it is back to zero when the high-interest rates kick in. You saved a lot of interest with a balance transfer.
On the other hand, if you’re still carrying a balance after that date, you made a mistake, and it could be a costly one. You’ll confront high-interest rates and fees. Be smart and crunch the numbers before doing the transfer. Divide the amount you owe by the number of months in this grace period. For example, say Consumer A owes $10,000 on the car. The amount divided by twelve months equals $833.34 a month. If Consumer A pays $833.34 a month for twelve months, Consumer A will beat a car loan interest charges by doing the balance transfer. Consumer A crunched his numbers to know for sure, and you need to do the same. So go ahead, crunch your numbers. Can you afford to make the payment every month for 12, 15 or 18 months? Wait! There’s more.
Balance Transfer Fees
Often the act of using the balance transfer tool in a credit card kicks in a balance transfer fee. This sounds like a small percentage when you look at it, maybe three percent, give or take a percentage point. But is it really so small? Three percent of $10,000 is $300. Does it still make sense to put the car loan on the credit card after you have added the $300 you pay right at the start?
So what other issues deserve your consideration before you do this?
What about a Financial Emergency?
Ironically, that sounds like a credit card's pitch: Use the card for financial emergencies? What about the kind of financial crisis that makes it difficult to keep up with payments to your zero-interest for twelve months credit card? Maybe you were injured at work or home, and the cast on your legs keeps you unemployed; maybe a hail storm pokes holes in your vinyl sided home, and the association demands thousands of dollars to fix it. This is a financial emergency. It could blow your budget up, and you may fail to pay the monthly amount on your car. You never saw it coming when you signed up for this!
In a nutshell, when you do a credit card balance transfer, you might put aside a good emergency nest egg. How about $6,000? This money is set apart by you somewhere so you can never use it. Then, when financial emergencies arise, you’ve got space to relax. With this safeguard, you are ready to apply for a zero interest rate card, an introductory rate which lasts twelve months, if you follow the example. You are ready to pay the entire balance off in the introductory period and impress your loved ones.
Try a One-Month Trial
So, you crunched the numbers and arrived at a monthly payment amount you must pay to avoid interest penalties at the end of the introductory period. Let's say that the number you arrived at is high, but not too high. It's feasible you could make those payments, but you might come up short. One strategy to mitigate risk involves trial payment of your car loan with the no interest credit card you chose. Rather than doing the balance transfer in one payment, just do just one payment with the balance transfer funds. In the ensuing 30 days, if you successfully pay the monthly balance you calculated, the trial was a success. If you fail to meet that one's month obligation, the balance transfer may not be the best strategy to follow. You may decide not to execute a balance transfer at all.
The Fallout If You Fail
So why do people have so much revolving credit in their wallet? It defies reason, but most consumers are irrational. The typical consumer wants a new smartphone, tablet, big screen tv, and they don’t want to wait and save the money up for it. To buy a pile of consumer items at a premium price could be called a monthly expense, but actually paying for it in a month is ridiculous. Much of it would be better done in an installment loan, but the bank would consider depreciation of such items and charge a high interest rate. The best way to handle monthly expenses like smartphones, televisions, etc., is on a cash-and-carry basis.
If consumers were rational, they would reason that their monthly expenses could be met by a credit card, but each monthly expense must be examined carefully to determine where it fits into their budget. Budgets then become a tool to help consumers manage money well.
Unfortunately, if you fall behind paying the balance, the high-interest rates will kick in. If you become unable to pay the balance owed along with the amount of interest due, you risk releasing a financial hurricane on your life. If you default on a credit card, the lending bank can get a civil judgment against you. They will then put a lien on your home, repossess your car, drain your bank account and garnish your wages. The only blessing is that lenders do this at a snail pace.
How to Do a Balance Transfer
How do you pay your car off with a credit card? There are two problems with using a balance transfer to pay a car loan: First, some banks do not accept credit card payments, and they won’t accept the balance transfer from a credit card to close the loan. Also, some car loans are structured so you cannot pay the loan off in a lump. You must pay the entire amount owed, as though you waited to pay it off until the last day. Secondly, credit cards charge fees to the car loan company as part of the process of the balance transfer. But that shouldn’t stop you from paying your car loan off this way. Go to your credit card company and do the balance transfer through them. If that fails, use a paper check issued by your credit card company to pay off your car loan.
The credit card is an unsecured loan. Defaulting on your credit card obligation could lead to a judgment against you. In that case, the lending institution can take your automobile. Also, they can also drain your bank account, put a lien on your home and garnish your wages.
Many people carry a hefty balance on their credit cards yet manage to pay at least the minimum payment every month, so why does their credit score suffer? Loading a credit card with debt is looked on unfavorably by credit monitors, so you lose points from your credit score if your credit card debt is too high. It won’t make it impossible to get a loan, but it does cost you interest rate points.
Knowledge is Power
If you decide against a balance transfer, understand that car loan problems are common. People get stuck with a dealership's high-interest loans for example. When monthly installments are paid regularly, your credit score improves. Suddenly, refinancing can become a real option. With a car loan refinance rather than a credit card balance transfer, you can lower your monthly payments, improve your credit score and get out from under a loan with rates and monthly payments you like.