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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 0 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 0 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.
Even 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 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, 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 0 percent intro APR on purchases for a limited time, but you should know 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 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 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 0 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, then 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 0 percent introductory APR on purchases for 15 months (followed by a variable APR of 16.49 percent to 25.24 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 welcome bonus: Earn an additional 1.5% cash back on everything you buy (on up to $20,000 spent in the first year, worth up to $300 cash back). You’ll also earn a flat 1.5 percent back on your spending.
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 (16.49 percent to 25.24 percent) on any remaining balance.
Is it a good idea to buy a car with a credit card?
So, is it a good idea to buy a car with a credit card? That is ultimately up to you and how you choose to spend your money. However, there are several factors to keep in mind when considering charging a large expense to any credit card.
Your credit utilization ratio
We previously mentioned how the closer you get to meeting your credit card’s limit, the higher your credit utilization ratio will be. Your credit utilization ratio is the amount of available credit you currently have available on your credit card. Ideally, you want to keep your credit utilization ratio low in order to keep a high credit score. An individual who maxes out their credit card is seen as a risk to potential lenders because you may be tied up in debt you are struggling to pay off.
If you find yourself in a situation where you have access to a credit limit large enough to purchase a car, it is important to generate a plan to pay it off before swiping your card.
0 percent intro APR
The rule of thumb to using a credit card is to never charge anything you can’t pay off immediately with cash, and the same rule applies here. Even if you are opting to use a card that offers a 0 percent intro APR period—typically between 12 and 18 months— you are going to want to establish a pay off plan to protect your financial health.
While a 0 percent APR period offers a great opportunity to pay for a large purchase over time without accruing interest, if you aren’t able to pay off the balance before the intro period ends, you’ll end up paying the card’s regular interest rate on the remaining balance. This could leave you with a hefty monthly payment if you purchase a car with a credit card and you can’t manage to pay it off during that time.
Make sure you know exactly when your promotional APR runs out and what the standard variable APR will be so you can work on paying off your balance beforehand.
A large purchase is an excellent way to maximize rewards, it can also make a lot a sense to use a specific card if you’re trying to hit a high spending requirement. However, once again, this only makes sense if you have enough cash to pay off the card right away. You can’t justify meeting the spending threshold for a hefty sign-up bonus if you run into high interest charges.
Alternatives to using a credit card to buy a car
If you find yourself in a financial situation where using a credit card to buy a car is beneficial for you because of a tempting sign-up bonus or 0 percent APR period, it may be easier to justify using a credit card to buy a new car.
However, if your finances are tight and buying a car with a credit card puts you in an enormous amount of debt, you should consider other options. Here are a few alternatives worth considering:
- Car financing: Auto loans allow you to borrow the money you need to purchase a car. Auto loans typically come with fixed rates that you may find to be significantly lower than the interest rates on a credit card. If you are skeptical about car financing because you have bad credit, there may be lenders who are willing to work with you.
- Ask someone to co-sign: If you’re ready to consider car financing but concerned you won’t qualify due to your credit score, you should consider applying with a co-signer. You want to find someone with good credit who would help improve your chances of qualifying for a loan, ideally with a lower rate. A co-signer could potentially be a family member, partner or close friend willing to take on the responsibility.
- Use cash: Most people can’t pay for a car with cash, but if you find yourself in a situation where you saved up enough cash to buy a car, whether it be for your dream car or otherwise, that may be more financially feasible than using a credit card that could jeopardize your credit over time.
- Ask about trade-in value: If you already own a car, you may be able to trade it in and collect enough money to use it as a down payment on a new car. Even if you think your car may not be worth much, it never hurts to try.
The bottom line
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.