Buying a car with a credit card seems like an awesome idea. Instead of doing a bunch of loan paperwork, waiting for credit approval, and going to the bank to get a check, you simply plop down the card, drive away in your new car, and watch your credit card rewards pile up.
But is it a good idea?
In general, the answer is no, and in most cases you won't be able to do it anyway. There are a few cases where it makes sense to put some of the purchase on a card, but you have to be very careful how you do it.
It’s Hard to Use a Credit Card For a Car Purchase
Perhaps the most important thing to consider: Dealers don’t want to accept credit cards. Just finding one willing to take a card for the entire purchase price will likely be impossible. That’s because merchants who accept them pay 1 to 4 percent to the card issuer in fees for each transaction they process. A dealership isn’t going to give up that much profit. It’s more likely that a car dealer will allow you to use a credit card for a portion of your down payment; their agreement with Visa, MasterCard, or American Express may also require them to accept payments by card.
Second, credit cards come with generous chargeback rights for customers who feel that they have been wronged by a seller. Just by placing a transaction into dispute, a customer could delay payment to the dealer for weeks or months. Most dealers are unwilling to accept that additional risk.
Additionally, credit card debt is considered unsecured, so the bank that issued the card can't repossess your car if you fail to make payments; a lender on a traditional car loan can repossess your car.
Why Buying a Car With a Credit Card Can Be a Bad Idea
If you’re thinking about using a credit card because you can’t qualify for a traditional auto loan due to recent credit challenges, you should not do it. Credit card interest rates tend to be substantial – often in the 14 to 28 percent APR range – so you can pay thousands of dollars in interest if you don't pay off the debt quickly. If you're only making the minimum payment or you can't make the minimum, you can quickly bury yourself in debt for a car that's worth far less than your card balance.
If you wreck your car, and the size of the check you receive from your insurance company is smaller than your balance, you’ll still have to pay off the entire balance. You can’t purchase gap insurance on a credit card balance like you can on a traditional car loan.
Even if your card has a zero-percent introductory interest rate, if you don’t pay it off before the card goes to its standard rate, you could pay substantial interest charges. There are horror stories online from customers who were sure that they were going to pay off their credit cards before the zero-interest period expired, only to suffer unexpected expenses that forced them to make massive interest payments on cards they couldn't pay off.
By using a credit card (or paying cash for that matter), you forgo the special financing deals that are frequently offered by manufacturers. A zero-percent offer for five years from an automaker is a much better deal than a zero-percent introductory rate on your Visa, MasterCard, or Amex card that only lasts a year, then goes to an expensive interest rate.
If you are in the market for a house, putting a large purchase such as a new car on a credit card dramatically raises your ratio of debt to available credit and harms your credit score. If your mortgage lender runs a check while your credit report still reflects the auto purchase, you could be declined or asked to pay a higher mortgage interest rate.
Many card issuers have limits for how many rewards points, frequent flier miles, or cash back benefits you can accrue in a month, and some don't allow benefits to be earned at all for motor vehicle purchases. Be sure to check the fine print in your cardholder agreement to ensure that you’re getting the benefits that you expect. While many cards offer to double a manufacturer’s warranty for free on purchases, vehicles are generally excluded from the programs.
When Using a Credit Card Makes Sense
There are a few situations in which using a credit card for part of the purchase price of a car can be a real deal. If you have a card with generous benefits and already have the money in the bank to pay off the entire amount when your next bill comes due, using one could reap substantial rewards.
However, don’t use a credit card to buy a car until you’ve done the math to understand how much the card’s rewards are worth. If you put $5,000 on a 1 percent cash back card, you’re only going to get $50. Make sure that you’re not being charged more than that by the dealer for the privilege of using your card. If you’re using a travel rewards card, try to place a value on the benefits you’ll get (air miles, hotel points, etc.) and compare them with any additional transaction costs.
Buyers with excellent credit can earn extra rewards for the first few months of purchases if they can qualify for a card with an introductory bonus, then use the card to help buy a vehicle. For example, Chase is currently offering 50,000 bonus points after you spend $4,000 using the Chase Sapphire Preferred Card in the first three months that you have the card. That’s worth $625 in travel benefits or $500 cash back. Be sure to balance the annual fee with the value of the money or benefits that you’ll receive.
If you can’t pay the full purchase price, paying the down payment on a card might be a good compromise that still earns you some rewards and limits your risk, and perhaps still allows you to take advantage of special financing deals. Even if there aren’t any deals available, you’ll be able to make monthly payments on the remaining balance at auto loan interest rates instead of much higher credit card rates.
Buyers of low-cost used cars with high limits on their cards and the ability to quickly repay the balance may also be able to reap some rewards. If you’re buying your teenager a $5,000 used car, the dealer may allow you the convenience of using your credit card. If the price is much more than $5,000 however, you’ll likely have trouble when you try to use it.
Many automakers offer credit cards that provide extra rewards for doing business with their dealerships. One of the best is GM’s BuyPower card, which allows cardholders to earn points toward the purchase of new GM vehicles.
How to Buy a Car With a Credit Card
Always negotiate the price of your car purchase before you discuss how you are going to pay for it. That goes for financing, leasing, paying cash, or using your credit card to help with your purchase. Just by telling a dealer that you intend to use a credit card, they could raise the price that they want to charge you by a few percent to make up for their transaction cost.
You'll likely meet some resistance, so you might need to ask to talk to a manager and remind them that, according to many credit card merchant agreements, businesses that accept credit cards for any transaction (including service) cannot refuse to do another type of transaction by credit card.
Be firm, but not unreasonable, and give them the option to compromise by agreeing to put only a portion of the purchase price on your card (the down payment, perhaps). Your greatest power in any car-buying transaction is your willingness to walk away from the deal, though you’ll have to balance the value of your time with any rewards you may forfeit.
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