Can You Buy A Car with A Credit Card?
Purchasing a new vehicle can be a considerable expense -- but it may be beneficial to you to cover the expense with a credit card. As with most financial decisions, you should consider all financing options available to see if you can save money. This article will help you figure out if using a credit card to buy a vehicle is possible, and whether or not it’s a good idea. Along the way, we’ll also provide answers to the following questions:
Will the dealership allow you to buy a car with a credit card?
Why or why not is it a good idea to use a credit card?
Can you partially pay with a credit card?
Why would a car dealership allow me to use a credit card?
Can You Use A Credit Card to Buy A Car?
The simple answer is, yes -- though the degree to which this is successful varies from dealership to dealership. Many auto dealers won’t allow the entire purchase price to be charged to a credit card since they are responsible for any transaction fees (imposed by Visa, Amex, Discover, etc.) associated with using credit cards. The average profit margin on a car sale is just over 2%, so an additional transaction fee ranging from 1% to 3% drastically reduces the dealer’s already-thin margin.
Should You Buy a Car with a Credit Card?
If you are debating whether or not to use a credit card to purchase your next vehicle, there are some factors to consider before swiping the plastic.
Do you have a high credit limit?
The most significant determining factor in whether you should purchase a car with a credit card is if your credit limit is high enough to accommodate the expense. In some cases, your credit limit may be too low to buy a car, and you will need to request a credit line increase from your credit card company. They may not be able to approve the increase, and you will have to build stronger credit over time to increase it. In other instances, you may only be looking to charge a downpayment or a portion of the car purchase to a credit card. If that’s the case, jump ahead to the section titled, “Can You Pay Partially by Credit Card for the Car?”
Can you afford to pay off your card in full?
Credit cards enable cardholders to purchase goods and services based on the buyer’s promise to the credit card issuer to pay them for the expenses plus an agreed-upon interest charge. Just like a loan, it is important to make payments towards your accrued balance. The average credit card interest rate is approximately 15%, almost three times higher than the average auto loan rate of 5.27%. This means that before you use a credit card to purchase a vehicle, you should be able to pay off your credit card bill in full to save money that would otherwise be applied to interest charges. If that is not feasible, you may want to consider a traditional auto loan, or having a plan in place to make a car purchase without earning interest. To learn more about how to do that, refer to the section, “Why It Might Be A Good Idea to Use Your Credit Card”.
Do you take advantage of credit card cash-back or points programs?
Credit cards are a topic of controversy among personal finance experts and consumers. Some individuals have a negative opinion of credit cards, and others use them as tools to generate wealth and take advantage of rewards programs. As a cash-back or points program participant, a car purchase would easily help reach a minimum spending threshold to earn a sign-up bonus (in cash-back or rewards points). Additionally, if you were ever in need of a rental car, some credit cards offer auto-related protection programs, such as rental car insurance. If you use your credit card responsibly and have a plan to pay off your balance, making a vehicle purchase with a credit card could be advantageous for you with the benefits these programs can provide.
Using a credit card to buy a new car will ultimately come down to your financial situation and preference. Before making a decision, consider the factors above, and research additional fees that may be involved with using a credit card.
Will Dealerships Allow You to Buy A Car with A Credit Card? When Would They Allow You?
Most car dealerships will allow you to use a credit card as a form of payment in some capacity, though the only way to be truly sure is by contacting them. Data points suggested that in some cases, cardholders could purchase a vehicle in full with a credit card without paying any additional fees. Others reported they were not as lucky and were either allowed to pay in full but charged transaction and processing fees, or only apply credit towards a downpayment or other partial payment.
To have the best success, call dealerships near you and ask if you can use a credit card to purchase a car. Be sure to find out how much of the car price you can use a credit card towards and if you will be responsible for any additional fees. It should also be noted that some dealers will be more receptive and understanding if you explain your purpose behind using a credit card (i.e., rewards credit card, lower interest rate, etc.).
Why It Might Be A Good Idea to Use your Credit Card
The reasons for using a credit card to buy a car will likely be different for each individual. Some scenarios of when using a credit card for a car purchase could be beneficial are listed below.
Using a 0% APR credit card or having a balance transfer offer
When making large purchases, finding the lowest interest rate is a good indicator for getting the best deal possible. After opening up a new credit card, cardholders will typically be offered a period of 0% APR. The 0% interest rate duration can differ depending on the credit institution and the particular credit card. Typically, new credit cards will have an introductory 0% APR for the first 12 months of the card being open.
Similar to an intro 0% APR rate, some cardholders are offered the opportunity to transfer the balance of one credit card to another for a limited period. Balance transfers give cardholders the ability to pay 0% APR on their transferred credit card balance for as few as four months, to as many as 20 months, depending on the credit card. A balance transfer will usually cost an additional 3% to 5% of the total amount of the balance that is transferred. However, that amount can still be drastically less than what the accrued interest would be over the term of a high-interest rate auto loan.
If you are considering using either of the methods above, be sure to research your current credit card APR, as that will be the interest rate you will be paying once your zero-interest rate period ends. Ideally, you should always be able to pay your credit card bill in full to avoid interest charges or penalties, but if that’s not feasible, you should then be mindful of your assigned APR.
Note: Nerdwallet compiled a list of their picks for the best balance transfer and 0% APR credit cards of 2020.
Participate in cash-back or reward points programs
Participants of credit card reward programs will already know what MSR (minimum spending requirement) is, but for readers who don’t, it refers to the minimum amount of money a customer must spend to qualify for the sign-up bonus associated with a credit card. A sign-up bonus can be cash-back or points, typically in the tens of thousands for points or cash equivalent for cash-back. Sign-up bonuses are valuable because the MSR to receive bonus points does not match the amount you would usually have to spend to accrue the same amount of points.
For example, 60,000 points would require an individual to spend $60,000 at a 1 point/dollar rate. Sign-up bonuses give cardholders those same 60,000 points if they spend $4,000 within the first three months of the card being open.
The number of points can vary between purchases due to point multipliers. Multipliers allow cardholders to maximize their earning potential by using categories that have an increased point to dollar ratio.
For example, $500 spend towards travel will give you 1,500 points at a 3 point/dollar rate.
Any accrued points can then be redeemed for cash-back, travel rewards, special events, etc. Individuals who participate in credit card reward programs view cash-back and points as free money and enjoy reaping the included benefits. Benefits can vary between credit cards, so be sure to research the available cashback cards or rewards cards and what the card offers. It’s also important to be mindful of your APR and whether or not you have enough cash to make your credit card payments.
Note: The Points Guy is a travel website that mainly publishes credit card reviews and articles about how to accumulate and use airline points and miles with credit cards. Check the TPG website to learn about the best credit cards for purchasing a car.
Why It Might Be A Bad Idea to Use your Credit Card
Using a credit card to purchase a vehicle may not be the best option if you meet any of the following criteria:
You have bad credit, and/or cannot make monthly payments
If you don’t have good credit, you should proceed with caution regardless of what kind of financing you choose. With a low FICO score, it’s unlikely you’ll qualify for the best rates with a traditional car loan, but it’s almost guaranteed your interest rate will be lower than it would be using a credit card.
If using a credit card will cost you more in the long run
Although using a credit card presents various advantages, in some cases, it may cost more than it’s worth. In addition to balance transfer fees and the APR, an annual fee is another expense to be mindful of when using a credit card. More lucrative credit cards (Chase Sapphire Preferred, American Express Platinum, etc) that offer more points per dollar of spend will often have an annual fee. They can range from $95/year to more than $550/year. Be sure to use your APR to calculate the accrued interest you can expect to pay over your repayment term. Add any applicable balance transfer or annual fees to give you an idea of the total amount you’ll owe. You can compare the total cost to other financing options to help decide whether or not using a credit card is a good idea for you.
You want to pay off your car slowly
Some car buyers want to, or only have the option of paying off their car at a leisurely pace. Credit cards are not ideal for this manner since average interest rates are in the double digits, and you’ll end up paying more in interest. If you need more than 20 months to pay off your car, it is probably best to look into other financing options.
Can You Pay Partially by Credit Card for the Car?
Yes -- dealerships who accept credit cards as a form of payment will allow you to make partial payments. This is likely the car dealer’s most preferred method when it comes to paying with a credit card. Many car buyers will only use their credit card for the down payment since that expense is usually well within the cardholder's available credit. Others will use a credit card for a portion of the car’s price that allows them to achieve the MSR. Ultimately, it’s at the dealership’s discretion of what they will accept credit card payments for.
Why Would the Dealer Allow You To Do This (hint you’re probably getting a bad deal)?
Unbeknownst to the buyer, dealers have the right to and often will raise the cost of the car if it is being purchased with a credit card. The reason for this is because dealers don’t want to lose their profit to transaction and processing fees associated with using a credit card. By increasing the cost of a vehicle, the dealer ensures they can make their standard 2% to 3% profit without worrying about the additional fees. With used cars, the profit margin is higher for the dealer, so they are more likely to accept a credit card for the purchase.
Refinance with WithClutch
If you decide against purchasing a car with a credit card and ultimately finance with an auto loan, find out how you can lower your loan payments using WithClutch! WithClutch can help save you money and time by allowing you to refinance from the comfort of your home in less than 20 seconds. If this is something that appeals to you, follow these simple steps to begin your refinance journey!