Fed up with making car payments each month? Considering using a credit card with a high credit limit to pay it off, or would it be smarter to let the auto loan run its course or accelerate payments to ax the debt sooner? It depends on a number of factors.
Read on to discover when it makes sense to use a credit card to pay off your ride.
Is It Sensible to Pay Off a Car Loan With a Credit Card?
There are two types of credit cards you can use to pay off a car loan:
Balance Transfer Credit Cards
Balance transfer credit cards allow you to make interest-free purchases for a set period, which could be 12, 15, 18, 21 or 24 months. Assuming you make timely payments each month, avoid exceeding the credit limit, and pay the balance in full before the promotional period ends, you’ll steer clear of any interest and penalties with the exception of the annual fee (if applicable).
But what happens if you aren’t able to pay off the outstanding balance before the interest-free window lapses? You’ll be responsible for the interest on the balance that remains. Consequently, it’s only a good idea to use a balance transfer credit card to pay off a car loan if you’re confident that you can pay off the balance before the promotional period is over.
And to give yourself the best possible chance of success using this method, it’s a good idea to divide the amount transferred by the number of months you have to pay it off. That way, you’ll stay on track with the repayment plan and won’t be forced to come up with a huge wad of cash when you’re nearing the finish line. So, if you charge $25,000 and have 15-months before interest kicks in, you should be comfortable paying $1,670 per month towards your credit card balance.
Another important consideration: most balance transfers are accompanied by an initial fee equivalent to 3 percent of the amount transferred onto the card. So, you also want to keep this figure in mind when considering using a balance transfer credit card to pay off a car loan.
Standard Credit Cards
What if you don’t have a balance transfer credit card at your disposal? Even if you have a low-interest rate on another credit card, it’s not in your best interest to take this route to pay off your car loan. You’ll spend more on interest over the life of the loan because of how interest is calculated.
With auto loans, interest is tacked onto the principal and the final figure is divided over several months, or the duration of the loan to come up with your monthly payment. But credit card issuers compound interest, so you’ll pay interest on top of interest each month you have an outstanding balance.
To illustrate, assume you finance a vehicle for $15,000. The loan term is 60-months and the interest rate is 15 percent. You have a credit card with a limit of $30,000 and APR of 14.99 percent. Your monthly auto loan payments will be $357, and you’ll pay $6,411 in interest over the life of the loan. But if you decided to use your credit card to eradicate the balance, below are a few scenarios of how things would pan out:
| Monthly Payment | Time to Payoff | Total Interest Paid |
| $350 | 54 months | $6,610 |
| $325 | 70 months | $7,496 |
| $300 | 79 months | $8,675 |
The Impact On Your Credit Score
While using a credit card to pay off a car loan may seem like a wise move, you should understand the potential impact on your credit score. Amounts owed account for 30 percent of your FICO score, and revolving debts (or credit cards) play a huge part in this figure. Simply put, an auto loan with 98 percent of the balance outstanding won’t do much (if any) damage to your credit score, but a maxed-out credit card will.
Why so? It all boils down to your credit utilization ratio. The more credit that you have in use, the higher your ratio and the lower your score. Lenders like to see this figure at 30 percent or lower, and that’s difficult to pull off if you don’t have several cards with high credit limits and you decide to eat up a large sum of the credit you do have available by paying off an auto loan.
Scenario 1
| Outstanding Balance | Credit Limit | |
| Credit Card 1 | $150 | $1,000 |
| Credit Card 2 | $1,500 | $5,000 |
| Credit Card 3 | $2,000 | $15,000 |
Credit utilization: 17 percent
Scenario 2
| Outstanding Balance | Credit Limit | |
| Credit Card 1 | $150 | $1,000 |
| Credit Card 2 | $1,500 | $5,000 |
| Credit Card 3 (includes an auto loan of $10,000) | $12,000 | $15,000 |
Credit utilization: 65 percent
Viable Alternatives
Accelerate Debt Repayment
The more you’re able to pay each month on your auto loan, the quicker you’ll pay the loan off and the less you’ll pay in interest. But be sure to confirm that your lender does not assess prepayment penalties.
Don’t have much disposable income to work with? Revisit your budget to trim expenses and consider other ways to earn extra money. If you don’t have a budget, this comprehensive guide will get you started.
Improve Your Credit Score
By boosting your credit score, you’ll put yourself in the best possible position to snag a lower interest rate through refinancing. Keep in mind that your monthly payment will also be lower if the lender resets the loan term. So for this approach to benefit you, keep making higher payments to avoid paying more in interest over the life of the loan.
The Bottom Line
It may not be in your best interest to pay off a car loan with a credit card, even if you’re planning to use a balance transfer credit card as you run the risk of paying far too much in interest. Instead, work on improving your credit score to secure a more competitive interest rate through refinancing and rework your budget to pay off the loan faster.
