If you are in the market for a new car, you may get tempted to buy a car outright with a credit card. After all, there are a lot of benefits to paying for your car using a credit card. Probably the biggest benefit is that you can earn rewards on your purchase. Many credit cards offer rewards programs that give you cashback, points, or miles for every dollar you spend.
Another benefit of using a credit card to buy a car is that it can help you build your credit history. A good credit score is crucial if you want to get approved for loans in the future, so using your credit card responsibly can help improve your score over time. Plus, if there is ever an issue with the car and you need to return it or file a warranty claim, having a good credit history will make things easier.
Using a credit card may also provide some extra protection against damages or theft. Most major cards come with purchase protection plans that cover items purchased with the card against accidental damage or theft for up to 90 days after purchase. That could be helpful if something happens to your new car shortly after buying it.
But, while there are situations where it may be beneficial, the real question is whether you should buy a car with a credit card.
- While some dealerships allow you to buy a car using a credit card, it may not always be a good idea to do so.
- If you are considering using your credit card to buy a car, check with your credit card provider and car dealership first. Then, carefully weigh the risks and create a repayment plan.
- Other factors you should consider include the impact on your credit utilization, the credit card interest rates, and the reward potential.
Do Car Dealers Accept Credit Cards?
It depends. Some car dealerships may let you swipe your credit card to pay for your entire car purchase, while others may only let you pay for a portion of it (i.e. the down payment). Some might not accept credit cards at all. Every time a dealer accepts a credit card payment, they need to pay a credit card processing fee of 1-3.5% of the transaction amount, so some dealers may not want to cover these card processing fees. Instead, they may prefer other payment methods, such as cash, personal or cashier’s checks, money orders, and ACH transfers.
Buying a Car with a Credit Card
Before using a credit card to pay for your car, check the card’s interest rate, benefits of using a card, and how you will pay off your debt. Since credit cards typically have higher interest rates than auto loans, having a plan will help you weigh the pros and cons better.
1. Check with Your Credit Card Provider First
If you have a credit card with 0% APR, it may make sense to charge a car to your credit card to avoid interest charges from financing your car and using the card. With this type of card, you can pay off your balance over time without accruing any additional fees during the promotional period (typically 12 to 18 months). Alternatively, if you recently applied for a new rewards credit card, you could use this purchase to earn credit card rewards and meet the spending requirements to qualify for the sign-up bonus.
No matter what card you use, check with your credit card provider first to ensure the purchase will get processed. Since this is a fairly large purchase, you should notify your credit card issuer ahead of time. Anytime you make a purchase that seems out of the ordinary, it may come off as suspicious from a lender’s perspective and get flagged. For example, when I studied abroad a few years ago, my credit card was flagged for suspicious activity, and I ended up having to set location alerts on my card to be able to use it.
Additionally, confirm that you have a high enough credit limit to accommodate your purchase. If your credit limit is not high enough, you may need to ask for a credit limit increase. In that situation, your lender will pull a hard inquiry on your credit report, which dings your credit temporarily.
2. Find a Car Dealership Who Accepts Credit Cards
Most car dealerships tend to push their own auto financing options, so they may try to convince you to use alternative payment methods or will not accept credit cards as payment. Find out your options by asking your local dealerships what they can do for you.
When I went with my brother to purchase his car last year, the car dealer set a limit on how much he could swipe on his credit card. So, he had to pay for part of the down payment with cash and sign up for one of their financing options.
3. Weigh the Risks
If you decide to pay for your car with a credit card, some risks come along with it. For one, if you do not have enough money in your account to cover your purchase when the bill comes due, you could end up paying expensive interest rates on top of what you already owe. Credit card interest rates can be as high as 29% or more!
Additionally, if you miss even one payment on your bill, it could seriously damage your credit score and make it more difficult (or impossible) to get approved for future loans or mortgages. If you are using a 0% APR credit card, keep in mind that you will need to pay interest once the promotional period ends.
4. Create a Plan to Tackle Your Debt
If you want to purchase a car with a credit card, do the calculations to determine if it is worth the risk. For example, if you are counting on using a 0% APR card, calculate how much you will need to pay each month to pay off your card balance before the intro period ends. If you run the numbers and realize that it’s not realistic for you to pay off that amount within the period, you may want to consider alternative options.
Is it a Good Idea to Buy a Car With a Credit Card?
Now that we’ve covered the steps for buying a car with a credit card, let’s dive deeper into a few additional factors you should consider.
Your Credit Limits and Credit Utilization
Your credit limit is the maximum amount your card issuer will allow you to charge on your card. Your credit utilization ratio is how much of your available credit you are using among all your credit cards. For example, if you have a $1,000 limit on your credit card and you charged $500, your utilization rate would be 50%.
Many experts recommend keeping your utilization below 30%, as a high rate can hurt your credit score. Typically, I like to keep my total utilization under 10% to be safe. From a lender’s perspective, the more credit you use, the riskier you will appear as a borrower. You can calculate your utilization by dividing the total amount you owe by the total amount of available credit.
If you want to charge a car to your card, you need to account for how you will manage this purchase. Not only will you need a high credit limit, but you will also have to keep your credit utilization in check. If you do not have the means to pay off your balance or have a low credit limit, this option may not be worth the risks.
High Credit Card Interest Charges
Credit card companies make billions of dollars in profits each year from high-interest rates. That is because a large number of people will fail to pay off their balance in full every month and will instead get charged interest on the outstanding balance.
While it is true that credit cards can be helpful for emergencies or when you need to make a large purchase, they should only be used as a short-term solution. If you have a credit card with an annual percentage rate (APR) of 18%, for example, it will take you more than eight years to pay off a $1,000 balance if you only make the minimum monthly payment.
If you think you will have trouble paying off your credit card balance, you may want to opt for an auto loan instead, which typically comes to an average rate of 5% or less for a 48-month new-car loan. Compared to the average credit card APR of 16%+, the auto loan is a much better deal.
When it comes to using a credit card to pay for a car to earn rewards, it can help you rack up points quickly. That can be especially beneficial if you already have a high-earning credit card or if the car purchase is large enough to qualify for sign-up bonuses.
But, this option only makes sense if you can earn enough rewards to offset any fees or interest charges. Using a credit card can also lead to increased debt levels and interest payments if you can’t manage the balance responsibly. Mathematically, you cannot justify racking up large debts to meet the spending threshold for a welcome bonus if the interest charges will cost you more down the line.
Manufacturer Credit Cards
Many automakers offer branded credit cards that come with loyalty rewards. These cards can be a great way to save money on your next car purchase or other auto-related costs you make with the card.
There are several different types of rewards available from automakers’ credit cards, including discounts on new cars, discounts on service work at dealerships, and even cashback bonuses. So if you’re in the market for a new car or looking for ways to save money, check out your automaker’s branded credit card offerings.
For example, the GM BuyPower Card from Capital One gives you rewards that you can apply towards the purchase or lease of a new Chevrolet, Buick, GMC, or Cadillac, or for other qualifying purchases at GM dealerships. But, the caveat is that you need to spend a significant amount of money to buy a new car with the rewards or make a dent in the car financing.
Alternatives Payment Methods
If you are cash-strapped right now, using a credit card may be a good temporary fix now, but may cause you a lot of headaches down the line. Here are a few alternatives to consider instead:
- Car financing: You will usually pay a much lower interest rate on an auto loan than on a credit card. Shop around for the best rate to get a better sense of how much interest you might pay and what your monthly payments will be. If you’re lucky, the interest rate may be under 5%.
- Get a co-signer: If you don’t think you will qualify for an auto loan or other car financing options because you have a poor credit score, consider asking a family member or close friend with a high credit score to co-sign for you. If they are willing to take on the responsibility and put their credit on the line for you, that could drastically improve your chances of qualifying and getting a lower auto loan rate.
- Pay with cash: If you have enough money saved up, perhaps from a sinking fund, consider paying in cash. While you may not get your dream car, you will have peace of mind that you purchased a car within your price range and wouldn’t jeopardize your financial health.
- Trade-in a car: If you already own a car, you may be able to trade it in and use the money you get as a down payment for your new car.
The Bottom Line
There is no doubt that paying for a car with a credit card is convenient. You can use your card to purchase a car from a dealership or online, and the transaction is quick and easy. However, factor in your financial situation and weigh the pros and cons.
When you purchase something with a credit card, you are borrowing money from the credit card company. That means that you will have to repay the money plus interest. If you have the means to repay all your debt quickly, using your card for the entire purchase price or only a portion of the car will allow you to reap significant rewards and welcome bonuses. But, if you cannot afford to pay off your balance, your credit score will be affected, making it difficult for you to borrow money in the future.
While it may feel good to purchase your car without paying out pocket at first, making a large purchase with a credit card can be very expensive in the long run. Using your credit card as payment for large purchases like cars can lead to debt problems down the road. If used irresponsibly, credit cards can quickly spiral out of control and cause significant financial problems down the line. So, before using your plastic as payment for your new set of wheels, think about how this decision might affect your personal finances down the road.