In our modern day, we’re lucky as consumers to have a variety of payment options at our fingertips. Whether you want to pay with cash, credit card or debit card, we often have the choice to use whichever payment method that works best for us.
As of February 2023, the second most popular method of payment is a physical credit card being used 32% of the time by consumers. Despite credit cards only being the second most popular behind debit cards, credit card usage is rapidly increasing. During the second quarter of 2023, Americans racked up an additional $45 billion in credit card debt, which took the total to a whopping $1.03 trillion; this is the highest the Fed has seen since 2003.
While credit cards are no doubt a popular way to make purchases, you might be wondering – How big of a purchase can I make on it? Can I buy a car using a credit card? Whether you can buy a car using a credit card may depend on a few different factors, such as the car dealership, the type of credit card you have and your credit score.
In this article, we’ll be covering what you need to know about buying a car with a credit card, along with the pros and cons.
Generally, car dealerships do accept credit cards as a payment method, but it’s not very common to use it to purchase a car in full. This is because credit card companies charge merchants a fee for every transaction made. The transaction fee can differ depending on the credit card company, but on average, it’s around 1.5-3.5%.
This is why more commonly, dealerships may accept credit cards for smaller purchase amounts like the down payment up to a certain amount, car accessories or servicing. For larger purchase amounts, the dealership may pass on the credit card transaction fee to you. For example, if a dealership allows you to pay a $10,000 down payment on a credit card with an added 3% fee on top, you’ll end up paying $10,300 instead. Unfortunately, this can increase the overall cost of the down payment or car, so it’s a trade-off for convenience that you would need to consider.
The main benefit of buying a car using a credit card is the convenience aspect. Using a credit card doesn’t require you to go into the bank ahead of time to get cash or a bank draft, which can save you time. It can also be convenient if you don’t have the cash upfront to cover the entire cost of the vehicle, you can use a credit card rather than applying for a car loan and having to wait for approval. It’s also a more secure method of payment since the transaction is electronic, rather than carrying large sums of cash on hand that could get lost or stolen.
Another benefit to buying a car using a credit card is collecting rewards points. Credit cards typically have reward systems in place to incentivize consumers to spend more money. Some of them offer cash back, travel credits and more depending on the type of credit card you have. For those who pay off their credit card balances in full every month, these rewards are a bonus compared to spending on a debit card, which often doesn’t offer any rewards.
Lastly, you can take advantage of introductory credit card deals like a 0% APR offer or sign-up bonuses with a minimum spend. A 0% APR offer means you don’t have to pay interest on purchases for a certain period, which can help you save money on interest charges. Some credit cards have a sign-up bonus with a minimum spend during a certain period, and making a large purchase, such as a car, can help meet that threshold.
The main drawback of buying a car with a credit card is the high-interest rates associated with credit cards. As of March 2023, the average credit card interest rate is 24.08%, which is significantly higher than the average personal loan rate of 11.43% as of October 2023. This can make your car purchase even more expensive than you expected in addition to the potential credit card transaction fees that may be passed along from the dealership. On top of that, some credit cards may consider a car purchase to be a cash advance, which could make it subject to even higher cash advance interest rates.
Other drawbacks to think about are your credit limit and credit score. Most credit cards have relatively low credit limits compared to the cost of a car. This means you’d have to find another way to finance the remaining amount if your credit limit can’t cover the entire cost. Putting such a large purchase on your credit card can also negatively impact your credit score since it increases your credit utilization ratio. If your credit score decreases, it could be harder for you to qualify for other types of loans in the future.
Since fees and interest can quickly add up if you’re buying a car with a credit card and can’t pay off the balance right away, it most likely isn’t your best choice. There are several other ways to finance your car purchase that we’ve outlined below.
When faced with a big financial decision, it’s important to weigh the pros and cons carefully. Even though the convenience and rewards can be appealing, the potential drawbacks of interest and fees can easily outweigh the positives. If you’re still thinking of using a credit card to buy a car or even just the down payment, make sure you have a plan to pay off the amount as quickly as possible to reduce the amount of interest you’ll pay. Otherwise, it may be a better idea to shop around for auto loans to save money on interest. Just keep in mind to shop around for the best deal on an auto loan, just as you would with the car itself.
Learn all about the cheapest cars to repair and maintain right here.
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