Using a credit card to make auto loan payments can help borrowers to make ends meet temporarily when their budgets don't stretch far enough. However, putting car payments on a credit card can lead to big interest charges and risks to a borrower's credit score. It is important to carefully weigh the pros and cons of making even a single auto loan payment on a credit card before committing to this plan of action.
Written by Robert Greenbaum.
Updated December 8, 2021
Trying to meet all your financial needs isn’t always easy. If you have an auto loan, it’s especially important to prioritize making your loan payments to avoid losing your vehicle through repossession or hurting your credit rating. You might wonder whether using a credit card to make one or more car payments or to pay off your loan could help you financially. While it may be possible to use a card, you should first seriously consider the advantages and disadvantages of this approach.
Making Car Payments With a Credit Card
First, you’ll need to see if your lender will allow you to make your car payments by credit card. Many lenders only allow borrowers to pay by direct bank account withdrawal, debit card, check, or money order. Lenders that allow you to make payments with a credit card may require you to process your payment through a third-party company that charges a transaction fee.
There are some potential benefits to paying by credit card:
If you don’t have the money for your payment, paying with a card could keep you from being late and defaulting on your loan.
If you have a rewards credit card, making your loan payments with the card could help you get cash back or travel rewards.
If you can get a new card with a 0% introductory annual percentage rate (APR), you could temporarily float your car loan payments without paying credit card interest.
Paying with a credit card can also have serious drawbacks:
You may have to pay a transaction fee to a third-party processing company.
Even 0% APR credit cards require you to make your minimum monthly credit card payments on time to avoid late fees and to keep your intro APR. Additionally, if you don’t pay your card balance off before the promotional period ends, you’ll get charged a higher APR on the remaining balance.
If you’re not using a 0% APR card and you don’t pay your balance off completely each month, you’ll rack up interest charges.
If you don’t make at least your minimum monthly payment on time, your credit score will drop.
Even if you pay your bill in full and on time each month, your credit score could go down if your credit utilization ratio is high.
This Can Hurt Your Credit Score
There are many factors that help determine your credit score. One significant factor is the total amount you owe on all your credit cards versus how much credit you have available. Another important factor is the type of debt. Carrying a high credit card balance can harm your score by increasing your credit utilization ratio.
Your credit utilization ratio is the percentage you’ve spent of your total available credit on all of your cards at the end of each account’s billing cycle. It’s generally best to keep your credit utilization below 30%. The lower your credit utilization ratio, the better it is for your score.
For example, if you have two cards and each card has a $500 credit limit, your total credit limit is $1,000. Perhaps in a particular month your statement balance for one account is $290 and for the other account it’s $0. To calculate your ratio, divide your total balance owed ($290) by your total credit limit ($1,000). This comes to a credit utilization ratio of 29%, which is fine.
But let’s say you used the second card to make your $300 car payment. Now your two card statements have a total balance of $590 ($290 + $300), making your credit utilization ratio jump to 59%. Even if you pay both cards off completely by their due dates, your credit rating may still take a hit.
All Debts Are Not Treated Equally
Credit reporting agencies view revolving debt (such as credit card balances) much less favorably than outstanding debt on installment loans. Installment loans are loans for a fixed amount with regularly scheduled payments (installments). This helps lenders and borrowers calculate how long it’ll take to pay off the entire loan by a particular date. Auto loans and mortgages are prime examples. By transferring some of your car loan to a credit card, you’re turning your installment loan debt, which is less harmful, into revolving debt, which can do more damage to your credit rating.
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When Is It a Good Idea To Pay Off an Auto Loan With a Credit Card?
At some point, it may be tempting to use a credit card to pay off your car loan. It’s important to carefully consider whether it makes financial sense to do so. It might be worthwhile if all of the following are true:
You already have good credit.
The loan balance you’re paying is less than the card’s credit limit for the transaction.
Your total credit utilization will stay below 30%.
You have an achievable plan for paying off your new card balance.
You’ll save a meaningful amount of money after accounting for interest, fees, and any penalties for paying your loan off early (depending on your loan terms).
If you’re counting on taking advantage of a card with cash back or travel benefits, those often apply only to purchases and not to cash advances, money transfers, or balance transfer credit cards (discussed below).
Opening a new, low-APR credit card to pay off your car loan might be problematic if you already have bad credit or if you need to apply for another form of credit soon. Simply applying for a new account results in a hard inquiry on one or more of your credit reports. This can lower your score slightly. Getting a new card could hurt your credit, at least in the short term. Starting a new account and closing your auto loan could lower your credit score by:
Reducing the average age of your accounts,
Adding a less favorable revolving account, and
Losing a more favorable, active, installment loan account.
Making these financial decisions can be difficult. If you’re thinking about paying off your car loan with a credit card but aren’t sure how to proceed, consider getting advice from a professional credit counselor. This should be someone at an accredited, nonprofit credit counseling agency. At a minimum, the counselor should provide you with an initial, free session. Depending on your financial situation, Upsolve may be able to make a referral to a credit counselor. Additional information about finding a credit counselor is available from the U.S. Consumer Financial Protection Bureau.
Different Credit Card Auto Loan Payoff Options
There are more ways to use a credit card for paying off an auto loan than simply charging the full balance to an ordinary credit card like making a regular purchase.
Most cards allow you to get a cash advance. These are basically personal loans that give you money to use as you choose. Typically, you can do this through any of several methods, such as at an ATM or by making an online transfer into your bank account. If the financial institution issuing your card has a physical branch near you, you can get cash in person. Your credit card issuer may also mail you “convenience checks” that you can use to write a check to yourself. The credit limit for cash advances is usually lower than the limit for purchases.
Taking a cash advance from a credit card can be costly. You’ll likely have to pay a transaction fee of 3%-5%. If you have a 5% fee, it will cost you $50 to get $1,000 cash. And interest starts accruing from the day you get the money. Most credit cards provide a grace period until the statement due date. During the grace period, no interest is charged on purchases. But the grace period generally doesn’t apply to other transactions. So, while you can avoid interest charges on purchases if you pay your monthly balance in full by the due date, you won’t escape paying interest on your cash advance until you pay it back.
The APR for advances usually is much higher than that for purchases — sometimes by 10% or more. If you have both purchases and a cash advance on your card, and you only make the minimum monthly payment, your payment will go entirely toward the lower interest rate purchases, not the higher interest rate advance. Only amounts you pay above the minimum will go toward your balance with the highest APR.
You could use a credit card to do a money transfer (often called a wire transfer) to your lender. You’d do this through a money transfer service like Western Union. This is similar to getting a cash advance, only worse. You’d be paying the same high interest and fee for a cash advance, plus fees to the money transfer service. Because of this, you’ll want to do your best to avoid this option.
Balance Transfer Credit Cards
A balance transfer credit card is just a regular card that has favorable terms (particularly a lower APR) for directly transferring balances from other accounts onto the credit card. Even if your lender doesn’t accept credit cards for car payments, you should still be able to pay your loan off with a balance transfer. Balance transfers are done through the credit card issuer and usually can be made online, over the phone, or by mail using balance transfer checks from the credit card issuer.
You can’t make a balance transfer to a card issued by the same financial institution holding your car loan. You’ll need to make sure that the credit limit for balance transfers is enough to cover the loan balance. Almost all cards charge a balance transfer fee, typically around 3%-5% of the amount transferred.
Many credit cards offer a 0% APR for a limited period of time on balance transfers. For example, a card might offer 12 months of 0% interest on balance transfers as long as they are made within 60 days of opening the account. That said, to qualify for cards with the best terms you’ll likely need to have an excellent credit score. Good terms include 0% intro APR on balance transfers, long introductory rate periods, more time to make balance transfers, larger credit limits on transfers, and lower balance transfer fees.
Remember, even with a 0% intro APR card, you need to make at least your minimum payment each month, and you have to pay the entire balance off before the promotional period ends to avoid interest.
Unless the card also offers 0% on purchases, be careful about using your balance transfer credit card to make purchases. When you make a card payment, the amount equal to the minimum required payment first goes toward paying off lower interest rate balances — your 0% balance transfer. If you only pay the minimum each month during your promotional period for balance transfers, interest will accrue on your purchases. You’ll have to pay more than the minimum to cover the higher interest rate purchases.
Paying Off Your New Credit Card Balance
If you're thinking of using your credit card to pay off your car loan, you need to have a realistic plan for paying off the credit card. If you just transform your car loan debt into credit card debt, you risk increasing your overall debt and hurting your credit. If you just make the minimum monthly payment on a 0% APR balance transfer, that won’t be enough to pay the balance off before the intro APR period ends. Make sure you’ll be able to pay the balance off in time so you don’t pay more interest than you saved by paying off your auto loan with the credit card. The key to this is to follow healthy money habits like budgeting.
You may be able to use a credit card to make car loan payments or to pay off the balance of your car loan. If you choose to do so, make sure it will improve your financial situation, not make it worse. Take the time to figure out whether you’ll really save money in the short and long term and how this move will affect your credit score.