Dear Opening Credits,
I just got a $4,000 loan at 12 percent and change. Can I transfer that to a credit card or is it better to just pay it with a credit card? My credit score is 725. – David
Maybe you see this debt exchange as a way to rack up rewards points, but know that issuers don’t issue rewards points on balance transfer deals. However, you could end up saving money on interest charges, but before you proceed, you need to do the math and carefully consider all aspects of your transaction.
When most people borrow money from a bank, they do it to finance something, such as a car or home, that they can’t afford to cover in full. Then they send the lender fixed monthly payments with cash from their paychecks until the debt is deleted. It’s a simple transaction.
Taking out a loan and then repaying it with a different form of credit is more complicated. Unless you know you can get a better deal with the credit card, you could be treading water or even going under.
You have a good, but not great, credit score. Armed with that, you should be able to obtain a good, but not great credit card balance transfer deal. In today’s market, a good balance transfer deal has a 0 percent introductory APR that’s valid for a year or even longer. And if you do careful math, you may be able to come out ahead. Here’s an example of how much you can potentially save on interest charges:
Assuming it is a three-year loan, and using CreditCards.com’s payoff calculator for a $4,000, three-year loan, you would end up paying $783 in interest charges, and you would have a set monthly payment of about $133.
Snag a 12-month interest-free balance transfer deal and all it would cost you is the transfer fee, which is typically 3 percent of the balance (in this case $120). Using our 0-percent balance transfer payoff calculator, the monthly payment would bump up to around $343 if you can pay it off in a year, but if you could handle that, you’d come out ahead by $663 – and be in the black in one year instead of three.
And if you prefer to only pay half of the loan off in 12 months at 0 percent, you could still come out ahead if the APR on the card is around 16 percent, which is the average card APR on new offers right now. For example, using the CreditCards.com balance transfer calculator again, you could choose to pay $180 a month for 24 months and pay $292.
This chart shows different scenarios would play out:
|INSTALLMENT LOAN VERSUS BALANCE TRANSFER CREDIT CARD|
|Loan||Monthly payment||Total cost of loan|
|12% installment loan, 3-year payoff||$133||$4,783|
|Balance transfer, 3-year payoff||$130||$4,566|
|Balance transfer, 2-year payoff||$180||$4,292|
|Balance transfer, 1-year payoff||$343||$4,120|
|Assumptions: Balance transfer has a 12-month 0% intro period, followed by a 16% permanent rate. No further charges made on card. Total cost of balance transfers includes a 3% balance transfer fee of $120.|
Clearly balance transfers can be advantageous, but you have to adhere to the terms. Pay late and the super low interest rate will usually end and be replaced by a much higher rate. And if you don’t pay back the total balance within the low-rate promotional period, the regular APR will apply, which may be worse than what you have with the loan. See our 2017 Balance Transfer Survey to get an idea of what kind of terms you can expect.
Before applying for any balance transfer offer, read the terms carefully and do the math. To come out ahead, you must be certain that you can afford the higher monthly payments that would come with a quicker payoff.
As for making your loan payments with a credit card, the odds of your lender allowing card payments on a personal loan are slim.
My advice: If you’re diligent, you can save on interest charges with a balance transfer card. If you’d rather keep things simple, buckle down and concentrate on paying the loan the old-fashioned way. Figure out the most amount of money you can send to the lender and stick with it until you erase the debt. If you are seeking this option because funds are tight, you may even consider getting a second job to pay more each month or sell unnecessary items and use the proceeds to slash the balance.
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