Can You Buy a Car With a Credit Card?

Buying a car with a credit card is possible, but it’s important to be cautious when making such a large purchase. Credit cards often have much higher interest rates than auto loans, and falling behind on payments can have a disastrous effect on your credit score.

Here are some scenarios where using a credit card to buy a car is sensible, and others where it is not advisable.

When is it a good idea to buy a car with a credit card?

Using a credit card for a major purchase like a new car can, in some cases, be a smart move.

First, you’ll need a high enough credit limit to cover the vehicle’s cost. Some credit cards feature introductory offers for new customers, which freeze the interest rate at 0% for a period of weeks or months. This would allow you to pay off the balance on your credit card before those costly interest payments start rolling in.

Accumulating rewards points is another benefit of making a big purchase. Many credit cards provide customers with spending-based bonuses for using them in the form of cashback, airline miles or other benefits. Making a major purchase can cause the points to come flying in, but it’s important to ensure the price of the car, plus any interest accrued, is worth the price of gaining these rewards.

Another scenario where buying a car with a credit card makes sense is ahead of a guaranteed windfall like a bonus or inheritance. While this can seem like counting your chickens before they’ve hatched, you could use the card payment as a bridge until the money comes into your possession. Be careful, though, as any disruption or delay in receiving your payment can result in high-interest charges and damage to your credit score.

Finally, if you have no other option but to purchase a car with a credit card due to an urgent need, doing so can be a lifesaver. That said, it’s important to try to avoid these scenarios in the first place.

When is it a bad idea to buy a car with a credit card?

There are many reasons why buying a car with a credit card is a risky, sometimes unwise financial decision.

Firstly, there are transaction processing fees usually covered by the merchant. These fees are typically around 3%, which isn’t much for everyday purchases but can add up quickly when the transaction amounts to tens of thousands of dollars. The dealer you plan to buy from may require you to cover the transaction fee, which increases the price you’ll be paying right from the start.

Next, there are the interest rates that credit cards are notorious for. Recent data suggests that the average credit card interest rate is over 22%, while the average auto loan interest rate is just over 8%. If you’re going to carry a balance and not pay off the car in full right away, you may end up paying thousands of dollars more for the same vehicle.

Finally, there’s the effect that making such a large purchase with a credit card can have on your credit score. One of the metrics that lenders use to determine your score is credit utilization, or how much of your available credit you use. Carrying a $500 balance on a card with a $20,000 limit is no big deal, but as you get closer to maxing out your available credit you may start to see your credit score fall.

This problem is compounded by carrying the balance for a long time and worsens if you are late on payments. This indicates to lenders that you’re not in good financial shape and will make them more cautious about extending credit to you in the future. This is reflected in higher interest rates, meaning a higher cost of borrowing for you.

Alternatives to buying a car with a credit card

Thankfully, there are several ways to buy a new car that are much safer for your finances and credit score.

Financing is an excellent route, as it allows you to purchase a vehicle without paying for it in full up-front. As mentioned above, car loan rates are often much lower than those offered by credit card companies. Dealers are happy to provide financing on new and used vehicles because it allows them to earn more money through the combination of purchase price and interest payments than they would earn if you bought the car in one lump sum.

If your credit rating is already lower than optimal, you may be required to pay higher interest rates on a car loan. However, this can be circumvented by having a family member or friend with better credit co-sign on the loan with you. In this scenario, the third party guarantees to make payments in the event that you’re unable to, providing extra security for the dealer and resulting in an overall lower interest rate.

Trading in your existing vehicle or an older model you no longer drive can help lower the overall cost of buying. The value of the trade-in is subtracted from the price of your new vehicle, reducing the overall cost. This results in lower monthly payments and likely a lower interest rate, as a portion of the cost is already covered.

Pros & cons of buying a car with a credit card

To recap, here’s a list of the pros and cons associated with buying a car with a credit card:

Pros

• Big purchases can earn big rewards points.
• 0% introductory rates can allow you to pay off the car before any interest is accrued.
• Credit card payment can save the day in an emergency when all other options have been exhausted.

Cons

• The dealer may pass transaction fees on to you, the buyer.
• Credit cards often feature interest rates two or three times higher than a comparable car loan making for a much higher overall cost of borrowing.
• Potential damage to your credit score. Using the majority of your available credit can harm how lenders view you and may make them reluctant to extend future credit to you. Lenders mitigate this risk through higher interest rates.
• Missed minimum payments can quickly snowball and have a disastrous effect on your credit score.

Ultimately, buying a car with a credit card is risky and should only be undertaken after doing a cost-benefit analysis to make sure it’s a financially sensible move. The benefit of points or rewards earned may pale in comparison to high-interest payments and potential damage to your credit score. Buying a car with a credit card may be the right move for some, but only if the circumstances are just right.

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