Bucks Blog: The Risks of Transferring a Car Loan to a Credit Card

The credit card site CardHub.com recently reviewed current zero-balance credit card transfer offers and found that many cards let consumers transfer all sorts of debt — not just credit card debt — onto the new cards.

The site’s founder Odysseas Papadimitriou, writing about the findings for The Christian Science Monitor, said several major card issuers let you transfer car loans to their credit cards — in effect, letting you trade secured debt (the car is collateral for the loan) for unsecured debt. Some cards have introductory zero interest rate periods of up to 18 months. If you use such transfers strategically,  he says, you can lower the rate on your car loan, saving as much as $1,000 in interest charges.

If you have just one to two years left on your auto loan, he says, that means the credit card pays off your car loan, getting you the title to the car sooner than expected, and “ensuring that payment difficulties won’t result in your car being repossessed.”

The catch, of course, is that you actually have to pay off the loan before the zero interest period expires. Otherwise, you’ll end up paying double-digit interest on the balance, negating any advantage from transferring the loan.

There are all sorts of potential downsides to such a move, says John Ulzheimer, a credit expert who writes for several financial Web sites. “It’s very dangerous for a variety of reasons,” he said.

First, he said, your credit score may take a hit simply because you’ve applied for new credit. In addition, you’re trading installment debt for revolving debt, which also tends to have a negative impact on your credit score. Installment debt has much less of an effect on your credit score than revolving, or credit card debt, because its typically secured by something and is less risky for the lender. Revolving debt is riskiest for the lender, so it has more impact on your score.

“Unless you’re financially capable of writing a check at the end of one year, you shouldn’t do it,” he said. And if you’re capable of doing that, he said, why not just write a check to pay off the car loan yourself?

Another potential flaw in the plan, he said, is that most zero percent interest offers are made only to people with sterling credit. And if your credit is that strong, you likely aren’t in a bind that would require transferring debt onto another card.

In short, it sounds interesting, “but if you think through the impact, it’s not really a good idea,” he said.

Have you ever transferred a car loan or other type of loan to a credit card? How did it work out for you?