Buying a car is a huge decision that should be made with research and planning. Part of that work includes figuring out a way to pay for your vehicle, which normally means taking out a loan since most people don’t have enough extra cash to pay for a car outright.
While most car dealerships have their own in-house financing options, you could also opt to pay for a car with a rewards credit card that lets you earn points or miles for each dollar you spend. If you have a credit limit of around $20,000, for example, 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.
How can I buy a car with a credit card?
There are many factors to keep in mind before you charge your new ride to a credit card, the most important of which is the interest rate you’ll pay. Since credit cards, on average, charge much higher interest rates than auto loans, you’ll only want to charge a car to your credit card if you have a plan.
For example, it could make sense to pay for a car with a credit card if you have the cash in the bank to cover the purchase. You could charge your car to your credit card, earn some rewards then pay your balance in full before any interest accrued.
Charging a car to your credit card can also make sense if your credit card has a zero percent introductory APR offer. This would let you pay your car off without interest for a limited time and potentially earn rewards along the way. Just note that, when your card’s introductory offer ends, you’ll be stuck paying your credit card’s ongoing variable interest rate.
Step 1: Check with your credit card provider
Whether you decide to buy a car with a travel credit card or a card with a zero percent introductory APR on purchases for a limited time, you’ll want to check with your credit card issuer to make sure the purchase will go through.
If your credit limit is high enough to accommodate the amount you want to charge, you’ll still need to notify your card issuer to inform them of the charge ahead of time. If you don’t, it’s likely that a large and unusual transaction like a car purchase will be flagged for fraud.
If your credit limit isn’t high enough, you might have to ask for a credit limit increase. Since it’s possible asking for a credit limit increase will result in a new hard inquiry being placed on your credit report, however, you may want to consider applying for a new rewards credit card instead.
If you picked up a new credit card for the purchase, you could earn rewards for each dollar you spend and a generous sign-up bonus.
Step 2: Find a dealer who is willing to accept credit cards as payment
This next part may prove tricky since many car dealerships would prefer to steer you toward their own auto financing options instead of accepting credit cards as payment. Either way, you’ll need to ask the dealer you’re working with if they’ll let you pay for the purchase with a credit card.
Some car dealerships will not accept credit cards as payment, in which case you can use another payment method or look for another dealer.
Also, be aware that some dealerships will let you pay for part of your car purchase with credit if you finance or pay cash for the rest. The only way to find out your options is by asking your dealership to see what they can do.
Step 3: Consider the potential risks
Many of the top cash back credit cards let you earn rewards for each dollar you spend and secure a zero percent intro APR on purchases for a limited time, but you should know that these offers don’t last forever. If you plan to pay your card off before your introductory offer ends but you fall behind, you could be stuck paying off thousands of dollars at an incredibly high interest rate.
Also, be aware of the potential risk to your credit score when you run up a credit card balance to buy a car. Since your credit utilization — the amount you owe in relation to your credit limits — makes up 30 percent of your FICO score, it’s fairly likely your credit score will drop if you borrow a lot of money with a revolving line of credit like a credit card.
Finally, don’t forget that credit options are limited if you have poor credit or fair credit. The top credit card offers will be out of reach for you if you don’t have at least “good” credit, which typically includes any FICO score of 670 or above.
Step 4: Create a plan to pay your balance off in time
If you purchased a car with a credit card in order to secure a zero percent intro APR, you should strive to pay your car balance off during that time period. To see if that’s possible, you should use a credit card payment calculator to figure out how much you would need to pay each month for this to happen.
If you run the numbers and find you cannot afford the monthly payment amount required to pay your car off before your intro APR period ends, you may want to switch from plastic to an auto loan with a lower interest rate and better terms.
How can you tell? Here’s an example of how the math could work.
Imagine you want to purchase a car for $10,000 and you sign up for the Chase Freedom Unlimited®. There’s no annual fee, and you get a zero percent introductory APR on purchases for 15 months (followed by a variable APR of 14.99 to 23.74 percent). With 15 months to pay off $10,000 without interest, you would need to pay $666.67 per month ($10,000 / 15 months = $667 per month) during that timeline.
If you can afford to pay that each month, you can reap the other benefits of this card, like the $200 bonus when you spend $500 within the first three months. You’ll also earn a flat 1.5 percent back on your spending and 5 percent back on up to $12,000 in grocery store purchases (excluding Walmart and Target) in the first year.
If you’re not sure you can afford that monthly payment, don’t let the rewards lure you. Be realistic about what you can manage in payments each month. Otherwise, at the end of the intro APR period, you’ll be left paying the variable APR (14.99 percent to 23.74 percent) on any remaining balance.
Buying a car with a credit card can make sense if you can earn some rewards and save money on interest for a limited time. Just remember to run the math and consider all the advantages and disadvantages before you take the leap. Using a credit card does let you access some perks, but you will only wind up ahead if you use credit responsibly and you have a solid plan in place.