Should I Use My Credit Card to Pay Off My Loan?

I recently checked my junk mail pile and I had four different letters from a single credit card full of balance transfer checks – all making an enticing offer to use to pay off my other bills, at 0 percent interest for a full year.

The notion of low-interest balance transfers is certainly a huge part of credit card companies’ offerings nowadays, one of the ways they try to attract new business in a field that’s overwhelmed with credit card offerings.

Some people have even considered using their high-limit, low-interest cards to pay off a car loan, not only to save monthly interest, but also to pay off the lender and get the car title in their own name.

On the surface, the balance transfer offer seems like a no-brainer, as well. Instead of continuing to rack up high interest charges on a department store card, why not centralize that debt and go with a lower rate? Or, in the case of a car, to be able to take charge of vehicle ownership and also reduce the interest rate at the same time.

The Balance Transfer Game

A few very motivated credit card owners have also figured out how to play the system to a degree, endlessly transferring their balances to different low- (or no-) interest cards, sometimes scoring big with the travel points, cash-back rewards or whatever goodies are associated with the new card.

In a way, it’s almost like giving yourself a homemade debt consolidation loan, with the opportunity to avoid some of the $1,000 or so the average U.S. family pays in credit card interest fees every year.

But like all things related to credit, consumers have to be careful in the way they manage their balances, their bill payments and, when it comes to opening new accounts to pay off old accounts, the impact that might have on your overall credit utilization.

People who use the balance-transfer option to pay off their automobile loan also have some special considerations. Since car loans don’t carry quite the same weight as credit cards when it comes to evaluating your credit score, transferring a balance to pay off your wheels could have a positive impact.

But subsequently loading a much larger balance on a credit card can also be a negative in the eyes of the credit bureaus. Some balance-transfer plans also prohibit using them to pay off a car; automobile lenders may also have penalties for early payoff of the money you owe them, so do your research before making any transfer moves.

Here are a few ideas to keep in mind when running the numbers and seeing if a balance-transfer arrangement is ultimately good in the long run, especially considering what it might do to your overall credit score.

Read the Fine Print – And Still Pay Your Bills

While the 0-percent-interest offers sure seem like a kindly gesture on the part of credit card companies, they also know that a considerable number of consumers won’t be able to pay off the transferred balance before the interest-free time limit expires, usually a 12- to 18-month period. Miss the deadline and that will mean an even larger balance at a still-significant interest rate.

If a balance-transfer offer seems to fit your lifestyle, great, but remember to take a little extra financial effort to make it work. Increase the amount you pay on a monthly basis to knock down that balance. Figure out the date when the no-interest offer expires, and write that on your calendar – use it as a self-motivating tool to pay off the balance in time.

Otherwise, you may find the deferred interest charges or even a penalty tacked onto your bill; as said, if you don’t address the balance, the leftover amounts will begin to accrue interest at a regular APR rate, and any savings can be lost in the long run.

Also, remember that new purchases made on your card during the low-interest balance-transfer phase will likely be charged at a higher rate than those transfers, so take care to examine the details on any balance-transfer offer.

Consider the Credit Impact of Spreading the Load

Unless you pay it off, debt doesn’t go away. And by redistributing the amount of money you owe from one particular loan or credit card and spreading it to other cards, you change a number of factors that go into building the score on your credit report.

Firstly, any new credit inquiries – necessary to open a new low- or no-interest card – do indeed appear on your credit report, so try to minimize your credit card applications, as too many can leave a bad impression on your report.

Likewise, keep credit utilization in mind. It’s typically recommended to use less than 30 percent of the available balance on any particular card, and while a 0-percent-interest offer might indeed save you interest elsewhere, adding the transferred balance to an existing card can significantly load up your credit utilization. And that can be another negative strike for your credit report.

Having too many open accounts at the same time can be a double-edged sword. Credit bureaus appreciate clients who have a well-balanced spread of credit utilization, but opening one or two extra accounts just to take advantage of a lower interest rate can also show that you’re spreading your credit a little too thinly.

And while credit cards do generally show more credit score growth than a car loan, owing too much on one card or putting too much weight on a brand-new card with no credit history (longevity of debt is also a consideration on your report) can also be a negative factor.

Balance transfers can certainly be a helpful tool, but be sure to use them correctly. If you would like some expert insight on credit repair, we can help, as well.

You can carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us tweet on Twitter.