Most people pay for a new vehicle with cash, cashier’s check or a bank loan. But what if you want to pay with a rewards credit card?
It may seem like an unconventional move, but it is possible to buy a car with a credit card at many dealerships.
Is it worth the hassle, though? There are several issues that could arise during the transaction.
I have helped many credit card users pick the right way to pay for a variety of transactions. In this article, I’ll walk you through nine things to consider when contemplating an auto purchase via credit card.
Buying a Car With a Credit Card: 9 Things to Consider
- Will Your Dealership Even Allow This?
- Will You Be Subject to Extra Fees?
- What Is Your Card’s Credit Limit?
- Is There a Transaction Limit on Your Card?
- Don’t Let Them Talk You Into a Cash Advance
- Will You Actually Receive Credit Card Rewards?
- Is There a Chance You’ll Owe Interest?
- Speaking of Credit Card Rewards: Can You Pay With Them?
- How Will This Impact Your Credit Score?
1. Will Your Dealership Even Allow This?
Just because they can doesn’t mean they will.
Not every car dealership will allow you to use a credit card to make a purchase.
So, before you start counting all the rewards points or miles you could bank with your car purchase, you’ll first want to inquire about the credit card policy at your dealership of choice.
You may find that they’ll allow credit cards for partial payments, such as a down payment, but may balk at the idea of paying the entire balance with a card.
For example, Tesla will only allow you to use a credit card for the initial order fee.
Remember: Don’t let your desire for credit card points cloud your judgment on which dealership is offering the best deal for your wallet. Don’t spend thousands more on the car to chase a few hundred bucks in credit card rewards.
2. Will You Be Subject to Extra Fees?
Just because your car dealership gives you the green light for a purchase with a credit card doesn’t mean you should automatically go along with it.
You need to follow up by asking for a clear picture of any potential fees you could be subjected to as part of the credit card transaction.
Typically, businesses that accept credit cards pay a card processing fee that can range from 1.5 to 3.5% of the total transaction amount. Your dealership may try to pass that fee on to you.
Also, keep your eyes open for any sort of “convenience fee” the dealership might try to tack onto your bill of sale as compensation for allowing you to pay with a credit card.
If you face any of these fees, you’re likely to find that you’re paying as much or more in fees than you’re receiving in credit card rewards. This could negate the benefit of paying with a credit card entirely.
3. What Is Your Card’s Credit Limit?
Even if you want to pay for your car with a credit card at a dealership that accepts them, you may not be able to do so.
You may run into an issue with your credit limit.
While some credit card users may enjoy a limit more than the cost of the average vehicle, many users are limited to $10,000 or less in spending power.
Unless you’re buying a value-priced used car, you may find that your credit limit is insufficient for a full price purchase.
Check with your credit card issuer for more information on your credit limit.
You can request a credit limit increase, but don’t expect it to increase exponentially and be aware of whether a hard credit pull is required.
Also, keep in mind that your credit utilization rate is a factor for your credit score. (More on this later.)
4. Is There a Transaction Limit on Your Card?
Even if you have sufficient credit limit to complete the purchase, you may find that transaction limits are an additional hurdle to clear.
Each card issuer has its own policy on transaction limits, but it’s possible that your card could cap your spending power to $5,000 per transaction, for example.
Some issuers also have a daily spending limit regardless of the number of transactions it takes to get there.
Generally speaking, these are built-in as a safety precaution to keep potentially fraudulent activity from spiraling out of control. However, it could be a real pain if you’re trying to spend $20,000 or more for a vehicle.
One potential workaround could be working out an agreement with your dealership to run a series of smaller transactions over the course of a few days until the full amount is properly charged to the card.
5. Don’t Let Them Talk You Into a Cash Advance
If you’re having credit card processing issues with the dealership for one of the reasons listed above, the topic of a cash advance from your credit card may be brought up.
DO NOT do this. You’ll likely end up owing the credit card issuer a pretty penny.
A cash advance fee is charged by the card issuer when you use your credit card to withdraw cash from an ATM or through a cash advance check. This fee is in addition to the interest rate charged on the cash advance and is usually a percentage of the amount withdrawn, typically around 3-5% of the total cash advance amount.
And, in most cases, cash advances are excluded from earning credit card rewards.
So not only would you be subjecting yourself to a hefty fee, you are likely forfeiting the rewards you were hoping to get in the first place. Avoid, avoid, avoid.
6. Will You Actually Receive Credit Card Rewards?
Some credit cards do offer rewards or cashback for buying a car, but this depends on the specific credit card and the terms and conditions of its rewards program.
Before attempting a purchase, it’s a good idea to check with your credit card issuer to see if a car purchase is eligible for rewards or cashback. Specific categories of purchases are sometimes excluded from earning rewards.
You should also carefully review the terms and conditions of the rewards program to understand any limitations or restrictions to the rewards program.
One popular restriction that could trip you up is a cap on the amount of cash back or rewards that can be earned in a billing period or annually.
If you can’t earn rewards on the full purchase amount, it may not be worth using a credit card to buy the car.
7. Is There a Chance You’ll Owe Interest?
Most people who use credit cards to buy a car view it as an opportunity to earn credit card rewards points or cash back.
Typically, they are actually “cash buyers” who are planning to pay their credit card balance in full as soon as their rewards are earned.
That’s great if things all go according to plan.
But these buyers should still be aware that even one missed payment on their card after purchasing a car could result in some pretty harsh interest charges on a large balance.
According to LendingTree, the average APR for balances on a new credit card is a whopping 23.84% as of April 2023.
Important: If you’re someone who would otherwise need a loan to pay for your car, do not attempt to pay the full balance with a credit card. You’re going to be much better off shopping rates at your local credit unions for a low rate on a traditional car loan. You’ll save more in interest charges than you’d ever earn with credit card rewards.
8. Speaking of Credit Card Rewards: Can You Pay With Them?
You may be able to use credit card rewards that you’ve already accumulated to defray the cost of your vehicle purchase.
This can be done a couple of different ways.
Many credit cards will allow you to redeem points for cash back or a statement credit. This “cash value” can be used to either add money to your payment method or serve as a statement credit toward your purchase if you actually use a credit card to make the purchase.
There also are credit cards that are specifically geared toward earning rewards that help pay for a new vehicle purchase.
For example, General Motors has a co-branded credit card rewards program that allows cardholders to earn rewards on everyday spending that can be converted into a reduction of purchase price on a new vehicle or as a payment towards a loan on a GM vehicle.
9. How Will This Impact Your Credit Score?
Buying a car with a credit card can impact your credit score in a few ways:
- Credit utilization: One of the main factors that affects your credit score is your credit utilization, which is the amount of credit you are using compared to your total credit limit. Using a large portion of your credit limit to buy a car could increase your credit utilization, which could negatively impact your credit score.
- Payment history: Your credit score is also affected by your payment history. If you are unable to make the minimum payments on your credit card balance, or if you miss a payment, it could negatively impact your credit score.
- Credit mix: Credit bureaus also consider your credit mix when calculating your credit score. If you have a mix of different types of credit, such as credit cards, car loans, and mortgages, it can positively impact your credit score. However, if you have a large amount of credit card debt and no other types of credit, it could negatively impact your credit score.
- Hard inquiry: Applying for a new credit card to buy a car could result in a hard inquiry on your credit report, which could lower your credit score temporarily.
It’s important to carefully consider the potential impact on your credit score before buying a car with a credit card. If you’re unable to pay off the balance in full, or if you’re using a large portion of your credit limit, it could negatively impact your credit score.
However, if you’re able to pay off the balance in full and on time, it could help improve your credit score by establishing a positive payment history and reducing your credit utilization over time.
Like most financial decisions we make, buying a car with a credit card is a matter of weighing the risks versus the rewards.
If your dealership says it is possible, you’ll want to consider whether the credit card rewards you can earn are worth the potential headaches of tacked on fees, the chance of owing interest and credit limit challenges.
Buying a car is an incredibly stressful situation for the average consumer. Because of this, many people are likely best served leaving this additional uncertainty out of the process and instead focusing on buying the right vehicle at the best price.
However, if you’re a savvy buyer with a smart payoff plan, a dealership willing to play and a credit card ready to pay out big rewards, you could make this transaction happen and be better off financially for it.
Have you ever bought a car with a credit card? If not, do you know someone who has? We’d love to hear about those experiences in the Clark.com community.