Credit card debt vs. car loan debt
June 27, 2006 4:18 PM   Subscribe

Which is a "worse" type of debt - credit card debt or car loan?

I have a goodly sum left to pay on my car (around $6k). The interest rate is 5.5%.

I have the opportunity to put up to 19K on a particular credit card which they say has a 4.9% APR until the balance is paid in full.

Obviously, one rate's better than the other which is why I'm tempted to pay off the car with the card, credit debt somehow "worse" or more insecure than car financing? Are there pitfalls to the credit card deal I'm unaware of (I had them confirm over the phone the rate for LIFE).

Please assume that a) I will never charge anything else to this card, b) I will pay more than the minimum, on time, every month, til death do us part amen.
posted by tristeza to Work & Money (26 answers total)
Credit cards are usually considered "worse" because they are unsecured, whereas car loans have an asset associated with them. In this situation, if you decided to do the transfer I would recommend paying at least as much on the credit card that you would have paid on the car loan b/c you will end up upside down on the value vs. debt on the car otherwise. Also, if you are looking to finance something large in the future, i.e., a house, the car loan may look a little better on your credit report.
posted by blackkar at 4:23 PM on June 27, 2006

You cannot rely on what the credit card company is "saying" but only what is in your card agreement. Including all the fine print. How do you propose to pay off the car loan with a credit card? Surely the lender does not accept credit card payments, so will you be using a "convenience check?" Know that convenience checks are usually considered cash advances and are frequently charged at a different (much higher) rate than purchases.

If you are satisfied that you *will* be getting a lower rate, then by all means it is a great idea to exchange your secured debt for unsecured debt at a lower rate.

Post any other info about the card deal here so we can check it out.
posted by grouse at 4:27 PM on June 27, 2006

Credit card debt may be slightly worse in terms of credit scoring, but the bottom line is it's all about your money and where it's going. I would take the lowest interest rate possible, without hestitation.
posted by knave at 4:28 PM on June 27, 2006

Yep, focus on getting the credit card paid off. The car is something tangible that you could theoretically sell, to pay off a substantial portion of that loan should you need to. Also, the car loan is over a fixed term - you have to pay it all off by date x anyway.

The credit card debt, on the other hand, is debt racked up on intangible things that you can no longer sell to get your money back (like the meal at the restaurant last Friday - Amex aren't going to want that back now), and the credit card will just keep churning along, charging you interest, as long as you have it.
posted by Jimbob at 4:28 PM on June 27, 2006

Read the fine print for that 4.9% rate. For example, what happens if you are a couple of days late with your monthly payment? A lot of these special rates zoom up to a really high rate under certain circumstances.
posted by NoMich at 4:30 PM on June 27, 2006

Ignore me, didn't read your question properly. I thought you had magically come across $19K to pay off either your car loan debt or your credit card debt. Rather you mean to pay off your car loan debt with a credit card. Sorry.
posted by Jimbob at 4:31 PM on June 27, 2006 [1 favorite]

The interest on the credit card may be for the original balance, meaning you are actually paying a higher effective rate. Read the fine print carefully.
posted by acoutu at 4:31 PM on June 27, 2006

It is indeed a "convenience check" deal, no balance transfer fee, 4.9% for the life of the balance. It is not considered a cash advance or purchase, according to the notice.

I am quite sure they will screw me if I am one second late with a payment (to the tune of 31.74%!! Jesus!)

The "fine print" on the back of the checks doesn't indicate anything weird that I can see, but maybe I need to look elsewhere for more "fine print"?
posted by tristeza at 4:36 PM on June 27, 2006

Jimbob makes a fine point.
posted by unwordy at 4:36 PM on June 27, 2006

Another concern about putting it on the credit card -- your agreement probably says that if you are late even once they can raise that 4.9% rate to something really ridiculous -- even in the 20% range. This means if your checking account is a bit low one month because a paycheck gets delayed, a payment gets lost in the mail or even if the CC company misposts a payment your car loan rate suddenly goes to the moon.

On preview, what NoMich said
posted by Opposite George at 4:36 PM on June 27, 2006

A lot of credit cards also have a clause that cancels the promotional rate if you are late in paying any debts. So that's scary.

I don't think 0.6% is worth the hassle of dealing with the credit card companies. Especially since it is very tempting to pay less than you currently pay for the car loan in a hard month, which will lengthen the loan and erase any benefit at all.
posted by smackfu at 4:41 PM on June 27, 2006

Can anybody with math skills calculate the dollar difference between sticking with the 5.5% rate and going with the 4.9% rate on $6000? I'll bet that the difference isn't much. Certainly not worth getting screwed to the tune of 31.74% if something along the lines that Opposite George is saying.
posted by NoMich at 4:41 PM on June 27, 2006

As far as credit rating agencies are concerned, credit cards are considered "revolving credit," as opposed to your car note, or a mortgage, etc., which is "installment credit."

IANAB, but in the process of buying a house a couple years ago, during which I paid more attention to my credit than I ever had, I learned that other lenders, when looking at your credit report, will consider debt represented as revolving credit much riskier than that represented as installment credit.

Plus I second all the others on credit card companies jacking your rate for any little infraction. I wouldn't put your car on your credit card.
posted by M.C. Lo-Carb! at 4:47 PM on June 27, 2006

Lowest interest rate on debt is always best. Credit score difference will be negligible in the short term, zero in the long term.

A little o/t - buying a car and incurring a large debt in the process is a really bad decision, because cars are among the worst "assets" you can have. They depreciate in value rapidly, never appreciate, are expensive to insure (especially in urban areas), and are always in some sort of peril unless you have it locked in a garage somewhere. There are too-many situations I can think of where you might end up with little more than salvage value, even with comprehensive coverage. You don't want to be stuck owing the balance of the finance plan, with no car at all, if that ever happens.

The best strategy with a car is to only buy what you can best afford with cash-on-hand when you can. Try not to finance most of the value of a new vehicle if you only have a couple of thousand in cash - that's not a good strategy. Buy something modest for your budget, and consider it throwing cash down a rat-hole for a common convenience. Resale value is to be considered a perk, not a guarantee.

Most people can find used cars that are very affordable and reliable - often a pristine-condition car is available at half of its original sticker price. I believe warranties are often transferrable, if you need the extra assurance. Most new car lots have an excellent selection of used or certified used vehicles, and they offer competitive financing plans (well, perhaps not competitive with 0% financing incentives on new cars, but comparable with a home equity loan.) And, although I still insist that resale value is a perk, keep in mind that young, used cars retain most of their resale value over the course of a few years with light usage.
posted by brianvan at 4:48 PM on June 27, 2006

smackfu and NoMich - you have helped me see the light.

That's exactly it - the savings really would be negligible, and I totally wouldn't pay as much towards the card as I do toward the car, and would ultimately probably end up paying MORE.

Fuckin a, guys. Thanks.
posted by tristeza at 4:49 PM on June 27, 2006

(Where were you when I was buying the goddamned albatross, brianvan!?!? :)
posted by tristeza at 4:51 PM on June 27, 2006

I just ran this through an amortization calculator. We don't know how many payments are remaining on the loan, so I chose 24 just for grins and made a few other assumptions.

At 5.5%, you'll pay $350 in interest on the remainder of the loan.

At 4.9%, you'll pay $311, assuming you pay off the credit card on the same schedule.

I will say loudly not worth it. You will have more than $39-worth of hassle just closing out the loan, even if they never ding you for a late payment or universal default.
posted by adamrice at 4:57 PM on June 27, 2006

I have saved thousands of dollars every year by paying 0% interest on large part of my mortgage which is 5% apr.

I have few cards that are at 0% for 1 year. and some at 2.9% until paid.

The thing to do is write out everything and plan ahead.

For example,

say if you have $200000 loan from bank at 6%.
You can first check out what kind of credit deals are out there... ( is great place find these things)

pick about three 0% for one year cards....
If you have a good credit score with minimum debts.. you should be able to get about $10000 or $20000 credit limits each... (usually Discover, Providian, Washington Mutual or other lesser known company gives more credits) (most of them have no-transfer fee)

open them at once preferably by internet... (** open a home equity loan account also .. maybe up to $50000 or more)

So you may be able to get total of around $50000 balance transfer from your home loan account. ( I was lucky enough to get around $80000...)

You are already saving around $4800 or little less the first year.

About a month before the 1 year mark, try to open another group of credit cards for $50000 credit limit.
If you are successful, transfer remaining debt from previous group of credit cards to new group of cards. Now you will be saving another few grands the second year.

IF you are not successful at getting large credit card limits due to what ever the reasons...., you can always transfer the debts from that first credit card group to your empty Home Equity Credit LINE (interest will be little higher than the home loan but this is a backup plan)
NOW when you call to close those debt free first credit card group, ask to see if they will offer another year of 0% or very little interest (1-3%) if they don't offer, just close it. in my experience, 2 out of 3 companies offered 0% or 2% for year again when i told them i will close... (most gave me another type of card from there bank.)

So at least for the first two years you will be saving quite a bit of money in interest. ALSO, because you may be paying little higher monthly payments (due to multiple credit card payments and you are only paying the principal amounts), you will actully be in habit to payoff your loan faster.

you can do this year after year by closing and openning....
You will not suffer greatly from credit score by having constant open/close record... as long as you are not too late or default on the credits... Everything is legal...and NO COMPANY will accuse you of taking advantage of those offers..... THEY ARE THE ONES who set the rules... and you are just following them.

I have done this for about a decade now.... never had any problem... except one time late payment to discover card...($25000 at 0% interest for LIFE... as long as i purchase $25 a month for 18% interest.... it works out to be about 4 years before those $25 a month purchase's interest become significant..... i forgot to buy something for $25 one month... but i called and they took care of the deal... just for the first and second time...)

THIS CARD SURFING METHOD ONLY WORKS FOR PEOPLE who have good credit score and some what organized... I am not that organized... but i write down every thing that i am suppose to do on a calendar... i write down "PAY OFF or TRANSFER $10000 from Bank A to Bank X on XX date"
i do this the day i make the first tranfers so i won't forget.

SORRY it is kinda long.. but i was on a roll.....
posted by curiousleo at 5:10 PM on June 27, 2006

by the way.. don't be scared about high credit limits.. I am totally an average worker in early thirties.... my income is smack dead AMERIAN average too... just keep calling and ask if you can get higher credit limits....

remeber you are not spending to shop around.. but you are paying for your core stuff like car, house, etc... just save some money by paying minimal or no interest.
posted by curiousleo at 5:14 PM on June 27, 2006

As others have said, they will bump you up to 20% APR (or whatever) at the slightest provocation. Don't do it.
posted by advil at 7:17 PM on June 27, 2006

IMPORTANT NOTE: Credit card debt may be worse because it is NO LONGER UNSECURED DEBT. They still charge like it is, but they can come after you BIGTIME for bad debts.

If you have a bad car debt, I think all they can take is the car, because that's the collateral. If you have a bad credit card debt, they can make your life much, much worse.
posted by Malor at 7:38 PM on June 27, 2006

Brianvan is right, cars are not great assets to take a loan against (though still better than credit cards). If at all possible you should only go into debt for something that appreciates (such as a house) or for your business, because you stand a good chance of receiving an actual return on investment.

Sometimes you can't help the car loan, though. I certainly can't promise I'll never take out a car loan again... but I'll think long and hard about it!
posted by lhauser at 8:05 PM on June 27, 2006

I'd just like to say that I transferred $3,000 of 8.5 percent interest car loan to a zero-interest-for-six-months, 3.2-percent-interest-for-the-life-of-the-transfer credit card a few years ago, and the savings allowed me to pay off the debt two and a half years early.

I wasn't able to qualify for a lower rate because my credit history wasn't long enough at the time I needed to buy a car. I read the fine print of the credit card, plus it was issued by a financial institution I trust (USAA), and I felt reasonably secure the interest rate would not skyrocket.

The credit card did have a policy that if I charged anything else, those charges would accumulate interest in the double digits and I wouldn't be able to pay them off until the entire lower interest transfer amount was paid off. So if I'd spent even $50 on the card beyond the loan, I could have wound up with quite hefty interest by the time I was able to pay it off. But I didn't spend a dime on the card until I'd fully paid off the car, so that was not an issue.
posted by croutonsupafreak at 8:09 PM on June 27, 2006

I am quite sure they will screw me if I am one second late with a payment (to the tune of 31.74%!! Jesus!)

This is easily avoided. Most card issuers will let you set up automatic minimum payments to your credit card through the their Web site. If your card issuer doesn't do that, then your bank probably has a bill pay service that'll work just as well (and it's probably free if you're with a big bank like Bank of America, US Bank, Wells Fargo, Washington Mutual, HSBC, etc.).

But yeah. Basically not worth it for half a percent.

they can come after you BIGTIME for bad debts.

In what sense can they "come after you"? Most credit cards still don't have security clauses in their cardmember agreements. The only major one that used to was Sears -- if you didn't pay they could come and repossess whatever you bought with it. However, none of my Visa cards have anything about that. If it's a change caused by the new bankruptcy law, it's the first I've heard of it -- and I've been paying pretty close attention to personal finance topics lately. Last I heard the Fair Debt Collection Act still applies.
posted by kindall at 8:27 PM on June 27, 2006

If you have a bad car debt, I think all they can take is the car, because that's the collateral. If you have a bad credit card debt, they can make your life much, much worse.

I used to work in Collections (in NYS) and dealt with both bad car debts and bad credit card debt.

Creditors are not limited to taking the car - they are entitled to any and all money that's owed to them. If the car's sold at an auction and the proceeds are not enough to cover the total debt, the borrower is still responsible for the remaining amount.

Beyond that, it's been my experience in collections that a car debt and a credit card debt are the same - one is not "much, much worse" than the other - they both kinda suck. Wage garnishment, bank account freezing, things like that.
posted by Lucinda at 8:42 PM on June 27, 2006

If you have a bad car debt, I think all they can take is the car, because that's the collateral.

Not necessarily. Compare this essay written by two Minnesota attorneys for the U of M extension service (subject is primarily farm loans here), or this q-and-a from a California law firm, offering one-stop-shopping for lenders who want to repossess a car and get a judgment for a remaining balance on the loan. This Delaware general advice page talks about conditions where the 'deficiency' may or may not be collected on.

Bankruptcy, damage to the collateral, disputes over value of the collateral, disputes over sale of the collateral...all those can be complicating factors as well. That's where the attorneys really roll up their sleeves and get to work.

(Me: several years in debt collection, not a lawyer. Contact a lawyer in your state or jurisdiction if you need specific help.)
posted by gimonca at 9:19 PM on June 27, 2006

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