Back in 2017, I was on the hunt on buying a new car. When I settled on the car that I wanted, I realize that I did not have enough money in my bank account to cover the 7000 dollar down payment I wanted to give. I started to panic realizing that I would be walking away without a car until the salesman said "If you want, you could pay the difference with a credit card, that's if you have one with you."
As he mentioned that, I remembered that I had recently opened a Citi AAdvance MasterCard, and was thinking about how to spend $2500 to get the airline rewards. Thankfully this was my chance to pay for the downpayment and at the same time earn big rewards. I could not have been happier. I decided to charge 2000 dollars on the debit card and pay the remaining balance with my credit card. The next day, I paid Citi the 5000 dollars I spend on the down payment on the car.
In short, yes it's possible to use a credit card to buy a car. There are, however, several limitations that are in place that can vary from dealer to dealer.
Buying a Car Using Credit Cards: Can You Do it?
The short answer is yes you can. There are a few things to take into consideration when determining whether you can use a credit card to make a car payment. The first thing is whether or not the dealership itself will accept credit card payments. While most bank lenders are pretty lenient on what you use your credit cards, some dealers may not be up for the potential headache that may come from dealing with them.
The First Type: Costly Transaction Fees
When you buy anything with a credit card there is something called a transaction that every business has to pay when processing different credit cards. These fees can range anywhere between 1 to 2 percent.
Two percent may not seem like a lot, but when you start to add up those percentages on higher price items it can mean the difference between breaking even or losing money.
A car that is worth $20,000 can result in the merchant paying a $400 transaction fee which can eat into the merchant's profit. Meaning that a lot of dealers may avoid having a credit card as an option to pay. The ones that do may have limitations in place to prevent them from paying a high transaction fee.
The Second Type: Costly Convenience Fees
You may not be aware of this, but when using your credit card, stores and other business venues can charge a convenience fee. The amount that they are charged for processing can vary based on the dealership's payment processors as well as how they have it structured. Because of this, while larger and more established dealerships may have enough revenue to offset a larger purchase using a credit card, the same may not be true for a smaller dealership.
Similarly, if a dealership has certain restrictions on the credit card's bank, one of the stipulations may be the inability to purchase using a credit card.
Things to Consider
Either way, it is important to consult with the dealership itself on whether they will accept a credit card as a proper form of payment. Generally speaking, if the dealer is established, there shouldn't be too big of an issue.
The second thing you have to keep in mind, however, is your credit limit. Credit score maintenance notwithstanding the amount of credit required to cover the initial cost of the car (either the total cost or the down payment) will generally be fairly large, especially because the purchase itself is a car.
Similar to the first issue, provided your card has a high enough credit limit, you can purchase the car, in whole or in part, using a credit card. Ideally, to maintain good credit, consider using no more than 75% of the total limit.
What Type of Credit Card Works Best?
Now that you know that, with some exceptions, you can indeed use a credit card, let's take a look at which card is best. Keep in mind that not all cards are the same.
Some credit cards are specifically designed for larger purchases like a car. These cards are meant to hold fewer charges on your purchases and will generally have higher limits. A great example of this is the American Express Auto Purchasing Program. This card can connect you with over 10,000 different auto dealers around the country, making the experience considerably easier.
If you are thinking of getting a new card to purchase a car, consider looking for one with a 0% APR. These cards will result in paying much less on your monthly payments as, for up to 6 months, you will not carry an interest rate on the purchase. Again, this is only for up to 6 months and varies between the card type as well as your credit rating. Still, if you're are going to purchase in this magnitude, starting with as little interest as possible is certainly worth considering.
In addition, consider looking for a card with reward points offered. Some cards offer reward points when large purchases are made. These points can often be used for steep discounts on items or services. One common example used is first-class tickets or hotel trips. A great card to consider is the Amex Business Platinum Card which offers 75,000 points as a welcome bonus if you spend over $15,000 during your first 3 months.
Will Your Credit Be Affected?
While it may surprise you, using a credit card to pay for a car is not only not harmful to your credit score, in many ways it is preferable to getting a loan through a bank. Let me explain.
The way your credit score is affected is not by a particular purchase. What determines how credit cards affect your credit score has more to do with the frequency that you use the card, if you are spending beyond 75% of your limits, or if you are or are not making your monthly payments. These are the things that affect your score, not the size of a purchase.
In fact, if you can afford it, using a credit card may result in potentially improving your credit as opposed to harming it.
You see, when you apply for a loan through the bank, the first thing they do is look at your credit score and credit history. This is what's known as a "hard search" and does consequently cause your credit score to go down. The same is not true for using a credit card. As you already have the card, there is no need to get a loan or to wait on an acceptance from the bank.
Similarly, as you are not applying for the loan, you don't have to worry about unknown interest rates being given to you. As you are simply paying off your card's balance through the established monthly payments, you don't have to worry about a large portion of the money going towards the bank's interest rates.
The Best Time to Use a Credit Card to Buy a Car
By now you're probably wondering if there are any downsides to using a credit card to pay for a car. And while I agree that there are certainly a lot of benefits to using them, that isn't to say that there aren't any drawbacks as well.
If you don't have a large enough limit, they may potentially be quite disastrous, as putting a sizeable down payment on the card while still getting a loan could result in having to pay 2 separate debts rather than one. Similarly, for most cards, there are between 50-60 days in which you are expected to clear the debt. Failure to do so can result in a ballooning of interest rates, making them fairly exhausting to get out from under.
Ultimately, do some research and carefully look at your options. If you can get a loan that has favorable rates and has a down payment you can cover using your debit card, that is infinitely a better option.
If you have a credit card with a 0% APR while also offering some discounts or rewards, on the other hand, using it to make a down payment may be worth considering.
Conclusion
When it comes down to it, you can, in fact, buy a car using a credit card. However, be smart about it and know your limits. Credit card debt is one of the biggest issues plaguing the country and mismanaging your funds is much easier than you may realize. If you want to use your credit cards, do so only after consulting with a financial expert to see how using one will work for you.