A friend of mine (let’s call him Joe) recently took his car to a mechanic and, as expected, got some bad news. His car was in need of some fairly extensive repairs which ended up being quite expensive. After the mechanic provided a repair quote, he had to make a difficult decision to make. How to pay for the repairs?
Joe didn’t exactly have this repair in the monthly budget, so funding the repairs with an all cash payment wasn’t an option. Instead, he wanted to finance the repair costs and pay down the balance over time. Since he knew he was going to pay for the repairs with a credit card, he wanted to know what the best card to use would be.
The Mechanic’s Credit Card
Interestingly enough, the mechanic actually offered their own form of financing. Customers could sign-up for the mechanic’s credit card and get 0% APR for the first 12-months. This meant that Joe could pay down the repairs over a 12 month period and not pay any interest on the expense. While this might seem like a great choice, I personally see a few issues with using the mechanic’s credit card.
The first issue with most of these merchant credit cards is that most come with extremely high interest rates. So, while you might pay 18% to 20% APR on a typical credit card, most auto repair cards carry APRs as high as 30%. Obviously the APR is irrelevant if you make all of your payments on time, but if you miss a payment you could end up paying much more than you would have on a card you already carry.
The second issue is that you’re ultimately opening up another credit card account. This means you’ll have a hard pull on your credit report. These hard pulls could impact the interest rate you’ll pay on auto loans, mortgages, and other lines of credit. Likewise, after you pay off the repair balance you’ll still be stuck with this credit card with a high APR. Most likely that means you’ll want to close the account, which again could negatively impact your credit score.
All in all, signing up for the mechanic’s credit card might sound like a great idea, but I wouldn’t recommend it.
Using Your Existing Credit Card
Instead of singing up for a new auto repair credit card, I recommended that my friend start by paying the bill with his existing credit card. In this case, he carries the Chase Sapphire Reserve card, so at least he’d earn 1x Ultimate Rewards points on the purchase he could use for future travel.
However, using his own card created an issue. If he used his own credit card, he would end up paying ~20% of interest on the outstanding balance. This is obviously significantly higher than the 0% interest rate offered by the mechanic’s credit card.
So, if Joe was going to use the credit card he already carried, he would have to find a way to reduce his interest rate while paying off the balance.
Signing Up For The Citi Double Cash Card
Now, I realize that I said signing up for a new credit card wasn’t a great idea, but that’s only for a card you won’t keep long-term. I would absolutely recommend opening a credit card that you could keep forever.
With that, I’d absolutely recommend Joe open a Citi Double Cash card. As the name implies, all spending on card earns 2% total cash back. You earn 1% cash back when you make a purchase and another 1% cash back when you pay your bill. Furthermore, you can convert Citi Double Cash cash back into ThankYou points which are worth even more than cash back.
The reason why the Citi Double Cash card especially makes sense in this scenario is because Citi is currently offering 0% APR for 18-months on balance transfers. So, my friend could put the repair charge on his existing credit card and then transfer that balance (and any other balance) onto the Citi Double Cash card.
Taking this approach would mean he wouldn’t have to pay interest on his repair bill and he would add a great credit card to his wallet for long-term use.
Final Thoughts
While this situation is specific, the strategy could work for any unexpected expenses that come up in your life. Therefore, it is important to remember that 0% APR balance transfer offers exist. Likewise, it’s important to think long-term when opening a credit card. While opening a card on the spot might seem like a good idea, it’s much smarter to shop around and look at all of your options before signing up for a new card.
In this case, with the Citi Double Cash card, you’re getting the same 0% APR, for a longer period of time, and you’re getting a much better overall credit card. This strategy works especially well if you’re already carrying a balance on a credit card.
Finally, if you are going to put a charge on a card and carry a balance, it’s important to make note of your APR beyond the introductory offer. You might end up paying a lot more in the future than you originally bargained for with a 30% APR!
