February 5, 2023

The Pros and Cons of Buying a Car With a Credit Card

While it might be possible to buy a car with a credit card, it’s not always the best idea.

There are benefits to using a credit card if your goal is to earn rewards. But there are also additional costs you might have to bear if you pay with a credit card. So, let’s dive into the details so you can decide if buying a car with a credit card is the right financial move for you.

Do Car Dealerships Take Credit Cards?

Whether or not you can use a credit card to buy a car depends on the dealership. Some auto dealerships won’t take credit cards at all.

But among dealerships that do accept credit cards for payment, the rules differ. Some dealerships might accept a credit card for the entire purchase, while others only allow you to use a credit card for some (or all) of the down payment.

One of the biggest reasons car dealers don’t encourage using a credit card is that it costs them money. The dealership has to pay a transaction fee of around 3% when the customer uses a credit card. When you consider the cost of an average car, that fee can be an expensive way for them to make a sale.

Impact on Your Credit Score

Before you buy a car with a credit card, you need to know how it impacts your credit utilization ratio. This ratio is the amount of credit you’ve used compared with the total amount of credit you have available.

If your credit card balance exceeds 30% of your credit card limit, your score will likely go down. Here’s an example:

Let’s say you have a credit card with a $30,000 credit limit and a zero balance. You have your eye on a used red Toyota Camry that costs $15,000.

This is what happens to your ratio when you put the entire new car purchase on your credit card:

Credit utilization ratio: 15,000 / 30,000 = .50, 50%. Too high!

See the problem? A 50% utilization ratio can lower your score. It’s fine to go ahead if your circumstances can handle a few months with a lower score. But if you plan to apply for other credit, such as a mortgage, within the next six months, you shouldn’t take a risk with your credit score.

Now, putting a $5,000 down payment on a credit card is different. Your new utilization ratio is 16.7% (5,000 / 30,000). If you have the available cash to pay the balance off quickly and you’re only using a credit card to earn rewards, then this strategy is something to consider.

But before you get dazzled by all the rewards you could earn, you need to know about the additional costs that are involved when you buy a car with a credit card.

Buying a Car With a Credit Card Has Its Downsides

When you use a rewards credit card at a dealership, there are costly issues that can impact both you and the dealer.

  • Transaction fee: With a credit card purchase, the dealership has to pay a transaction fee, which is around 3%. Because of this, the dealership could cover the cost of the fee by charging a higher price for the car. Be aware of this possibility.
  • Convenience fee: If the transaction fee isn’t passed on to you, you might be asked to pay a convenience fee for using a credit card. This fee varies, but it’s usually between 2% and 4% of the purchase price.
  • Compound interest: It’s a bad idea to use a credit card if you plan to carry a balance. Credit card balances are subject to compound interest. This means your outstanding balance will grow quickly.

As you can see, even if it’s possible to use a credit card to buy a car, it might not be a cost-effective idea. To help you decide if it’s worth it to earn the rewards, estimate the added cost of using a credit card for the specific car you want to buy.
Do the rewards outweigh the added expenses? If they don’t, you should evaluate other payment options.

Other Payment Options to Consider

There are many different ways you can buy a car. The goal is to use a strategy that gives you the car you want at the best price possible.

Use a Credit Card With a 0% Purchase APR 

Rather than use a rewards credit card you already have, consider applying for a card that offers a 0% introductory purchase annual percentage rate for a period of time. During the introductory period, you can make payments for a year or more without paying interest.

If you have a balance when the 0% rate ends, you’ll have to pay the outstanding balance at a new, much higher rate. One strategy at this point is to transfer your balance to a balance transfer credit card. You’ll once again get a 0% APR for a year or more, though you will have to pay a balance transfer fee.

This strategy does require a good credit score. Don’t try this unless you’re confident you can get approved for one of the top balance transfer credit cards.

Use an Auto-Branded Credit Card

Some car companies offer co-branded credit cards. For example, My GM Rewards Card is offered by General Motors, and it’s issued by Goldman Sachs Bank USA.

Auto-branded credit cards often have generous rewards, but many of these cards only allow you to redeem your rewards with the brand. If you earn a lot of rewards with a car credit card, you could redeem them for a statement credit or use them to buy another car from the same brand.

Consider Getting a Loan 

There are a number of ways to finance a car purchase. You can go to your bank or credit union, find a lender online or finance the car through the dealership.

Compare rates and terms so you end up with the best deal possible given your credit score. Review the terms and conditions of the loan carefully, including the interest rate, the length of the loan and the monthly payment. Keep in mind that the shorter the loan, the higher the monthly payment.

Whatever payment method you choose, make the decision with your budget in mind. See how different monthly payments impact your cash flow and your ability to save money. This way, you’ll make an informed decision that works with your financial situation.

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