Buying a car is a big purchase that many people can’t pay for all at once.
While taking out a loan is an obvious option, it can pay to use your credit card instead. If you have a credit limit of around $20,000, you could easily cover the cost of a new ride and possibly earn rewards points at the same time.
If this is an option you’re looking to take advantage of, here are a few things to consider.
Conditions for using your credit card to buy a car
The first step is understanding the process. Most dealerships won’t let you cover the entire car purchase with your card, but they may offer you the option to put down a few thousand dollars on it. The rest would be paid off using a standard car loan.
One exception is buying from a used car dealership. They usually allow for a credit card to cover the full purchase, because their processing fees are not terribly high. New car dealerships, however, vary in how they handle credit card purchases, so ask the dealer what their policy is.
Ask a dealer about their policy for using a combination method – so you can split the purchase between your card and a loan.
Whether buying used or new, a combination method is often the better option. Consider that the average APR for a car loan is about 5 percent for a 60-month term. By comparison, the average APR for a credit card is nearly 18 percent – meaning your payments would be much higher if you chose to put the entire purchase on your card and pay it off over time.
Advantages of using a credit card to buy a car
Using your credit card to buy a car works when there’s an advantage for making such a large purchase. This may mean an introductory zero percent interest period or rewards points that offer immediate benefits for you.
Finding a zero percent interest offer
Purchasing a car with no interest might sound like a dream, but it can be a reality with the right card. There are several cards that offer an introductory zero percent APR. For example, the Capital One® Quicksilver® Cash Rewards Credit Card offers a zero percent rate on purchases for the first 15 months (then 16.24 – 26.24 percent variable APR) plus 1.5 percent cash back on each purchase. Before taking advantage of an offer like this, you’ll want to make sure that taking on another card is a good option for your wallet.
Earning rewards like cash back or airline miles is a great bonus to paying for your car with a credit card. With a card like the Chase Freedom Unlimited, you earn 3 percent cash back on your purchases in your first year up to $20,000 spent while accruing no interest for the first 15 months (then a variable APR of 17.24 – 25.99 percent).
Also, check the rewards structures for your current cards. See if you can earn a percentage back on purchase totals or points per dollar spent to get the best rewards on your car purchase.
Pay the balance right away
While a lot can be gained from using a rewards or cash back card to pay part of your car purchase, it’s all for not if you’re unable to pay off your balance in a timely fashion.
Treat your credit card like a debit card. This means always make sure you have the cash to pay off whatever purchases you are making. If you know you won’t be able to pay off the balance before the end of the zero percent introductory period, it’s best to not use the card at all. Interest rates for cards can increase up to near 30 percent after the introductory period, which will substantially increase your payments.
Disadvantages of using a credit card to buy a car
While there are advantages to paying for a car with a credit card, there are also clear disadvantages, like credit card interest rates or a smaller window to pay the balance on a card with an introductory rate.
High interest rates
Making large purchases on your credit card only really works when the interest rate is in your favor. Most cards will offer a lower rate for a period of time, but then the rate increases to anywhere between 13 and 27 percent or higher. And if the introductory rate is not lower than 5 percent, it may be best to just go with a standard car loan.
Paying over time
If you have a card that offers a low interest rate, but know you won’t be able to pay the balance off for a while, it’s best not to use the card for your car purchase. For example, let’s say you are able to put $4,000 of your car purchase on your card at a zero percent rate for 15 months. You make the minimum payment of $200 over this period, leaving a balance of $1000 on the card. After the introductory period, the APR increases to 17 percent and begins accruing daily on your total amount owed. This cycle will continue, costing you more in the long run.
Limited options due to poor credit
A poor credit score doesn’t put you out of the running for using a credit card, but it may change your options. You will likely have to get a secured credit card. Credit limits for most secured cards are linked to the amount of money you put down as a security deposit and it’s often more difficult to find a zero percent introductory rate with a secured card.
It makes more sense to take your security deposit and use it as a down payment on a car loan that will have a lower interest rate and cost less in the long run.
If you find a dealer who offers the option to purchase all or part of your car on a credit card, it’s worth doing the math to see if there is some benefit in it for you. If the numbers don’t balance out in your favor, it’s better to look at a different way to finance your car purchase, such as a traditional car loan.