Got a question yesterday from one of the readers:
I currently have about $11,000 left on my car loan at around 7% interest, but was thinking of getting a 0% balance transfer and paying it off. I understand that after the 0% period ends I will have to find another card, but do you think it is worth the hassle?
That is a toughy, I gotta say. I know a lot of people would yell NO from the top of their lungs immediately, and while I do tend to agree with them, I also think there might be something to this. Let’s look at the negatives first:
1. If you miss a payment or you are late on one or two, the credit card company can eliminate that 0% interest offer and raise it to your default (or worse, their default rate) which could be anywhere from 9% – 25% or so.
2. What happens at the end of the 0% interest offer? Will you be able to find another card to get a 0% interest balance transfer from? Maybe not…they seem to be drying up pretty quick.
3. If you were planning on renting an apartment or buying a house anytime soon, a balance on a car loan is pretty much seen as OK compared to $11,000 in credit card debt. They don’t care what it was for…on your credit report it will not show a car loan and will only show the credit card debt, so it will reflect poorly on you.
Now that we got those out of the way, although I cannot condone doing so (I wouldn’t, if that helps any), there could be a positive to doing this, especially if you can make huge payments to the credit card company every month to pay off the car within the balance transfer offer time period. You could:
1. Make your payments automatically so you never miss one. (I have been paying on car loans since I was just out of college off and on, and never missed a payment…so I cannot imagine missing a payment on a credit card.)
2. Save some interest. Let’s say your car loan was initially for $25,000 and you have been making payments on it for a few years. Example: every month you send the car company $495; but only $350 is actually going towards the car…the rest is interest. At the end of 12 months, you would still owe $6,800 on the car. If you had a 0% balance transfer, all $495 would be going towards the car. So at the end of the 12 month CC offer, you would only owe $5,060, a savings of $1,740. These numbers are made up and arbitrary, so don’t count on them being exact…I don’t know your exact details.
Hmmm…Even with the savings, it is just not worth it to me. I don’t like credit card debt, plain and simple. Mortgage and car loans I am OK with, but not credit card debt. If I were you I would stick with the car loan and just send extra money in every month or, depending on the year of the vehicle, see if a credit union or local bank will refinance at a lower rate for you. Hope that helps…
Anyone else have anything to say on this? Curious if my feelings are right or I am being overly cautious here…