Dear Mary: We are thinking of buying a used car. Currently, interest rates on auto loans at our credit union are 9 to 10 percent. We have a credit card offer in the mail that gives us a rate of 4.99 percent until the balance is paid in full. Is there any difference in the way credit card interest is calculated compared to a standard bank loan? -- Tena L., Texas

Dear Tena: Interest on credit card balances is determined using the "average daily balance" method. Auto loans come in at least two flavors: simple interest, where each month, you pay interest on the remaining balance (most common these days), and a loan method that uses the "rule of 78s," also known as "sum of the digits." In the latter, the interest is collected at the front of the loan period, so paying off the loan early saves nothing.

The net difference between a credit card loan and a simple interest auto loan is not that significant, provided you are not adding new purchases each month to the credit card balance.

But there are other reasons you absolutely do not want to pay for this car with a credit card.

In a credit card's fine print are these words: "Terms and conditions may change at any time and for any reason." I don't care what they advertise as the rate of interest on that card or whether they say it is fixed. They can -- and they probably will -- change that interest rate at any time and for any reason.

And if you are ever late by even five minutes with a payment, expect a huge late fee and the interest rate to jump to the default rate, which could be 28 percent or more.

The interest on an auto loan cannot change once it is executed by both parties. If you are late with a payment on a simple interest auto loan, you pay a stipulated late fee, but the interest rate cannot change.

Another problem: Who is going to accept a credit card as payment for a used car? If you limit yourself to only used car dealers who accept credit cards as payment, you will miss out on the best bets in used cars: those that are for sale by the owners.

If you are planning to take a cash advance on the card, that would be disastrous. The cash advance fee can be from 3 to 5 percent of the advanced amount! And keep in mind that there is no grace period on cash advances, and they are subject to a much higher rate of interest than transfers and purchases. You would be looking at a rate of 20 percent or more to start.

If you must get a loan, get a standard auto loan from your bank or credit union. Putting that car on a credit card is a huge mistake that you will regret for many years to come.

Do you have a question for Mary? E-mail her at mary@everydaycheapskate.com, or write to Everyday Cheapskate, P.O. Box 2135, Paramount, CA 90723. Mary Hunt is the founder of www.DebtProofLiving.com and author of 17 books, including "Debt-Proof Living." To find out more about Mary and read her past columns, please visit the Creators Syndicate Web page at www.creators.com.
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