It could be a smart choice with significant potential rewards if you wish to receive credit card rewards for your purchases and you can pay off the balance in a couple of months. However, if you are unable to purchase a car and do not wish to apply for a loan because you believe you will not be approved, it is a bad idea. Downright terrible, in fact.
Therefore, it’s important to consider the advantages and disadvantages of this purchase scenario before you lace up your shoes and head to the dealership with a plastic rectangle in hand. Doing so could save you a headache—and a whole lotta money.
It’s normal to wonder if you can use your reliable credit card to buy a car in today’s world where plastic is king. The answer, like many things in life, is a nuanced “it depends. Although it is technically feasible, using a credit card to purchase a car has a special set of benefits and drawbacks that should be carefully considered.
The Allure of Rewards: A Double-Edged Sword
The opportunity to accumulate a sizable number of rewards points or miles is one of the most alluring aspects of using a credit card to pay for a car. Imagine being able to redeem thousands of points or miles for free travel, lodging, or even cash back with just one transaction. However, this tempting prospect comes with a significant caveat: interest rates.
Credit card APRs, especially for rewards cards, tend to be significantly higher than those offered by traditional auto loans. If you can’t pay off your balance quickly, the interest charges can easily outweigh the value of the rewards you earned. In essence, you’d be paying a premium for the convenience of using your credit card.
Navigating the Processing Fee Maze
Numerous auto dealerships charge a processing fee for credit card transactions, which adds yet another level of complexity. This fee, typically ranging from 1. 5% to 3. 5%, further erodes the financial benefits of using a credit card. Make sure you are aware of the dealership’s processing fee policy before swiping your card and take it into consideration when making your selection.
Alternatives to Consider: A More Prudent Path
While using a credit card for a car purchase might seem appealing, exploring other financing options could prove more financially prudent. Traditional auto loans often come with lower interest rates, potentially saving you thousands of dollars in the long run. Additionally, consider leveraging your existing assets, such as trading in your current car, to reduce the overall cost of the purchase.
The Takeaway: A Balanced Approach to Car Financing
Using a credit card to pay for a car ultimately depends on your personal financial situation and risk tolerance. It might be a good choice if you’re sure you can maximize the rewards potential and pay off the balance quickly. However, looking into alternate financing options is the better course of action if you tend to carry a balance or have a tight budget. Recall that prudent financial planning is essential to a hassle-free and joyful vehicle purchasing experience.
Buying a car with a credit card: the upside
If you want to make a big purchase, using a credit card to finance it can get you some really great deals.
Most obviously, you can earn lots of rewards for that spending. By utilizing a card such as the Wells Fargo Active Cash 2% AE Card, which offers 2% cash back on all purchases, you would receive an efficient rebate of $400. Not bad, but it’s probably only worth it if you don’t get stuck with the processing fee. However, you can supercharge your rewards by grabbing a welcome bonus (or three).
As an example, let’s say your car purchase is $20,000. You could split the payment across multiple cards and easily earn bonuses** from:
- Capital One Venture Rewards Credit Card. 75,000 Capital One miles following a $4,000 purchase threshold met within the first three months of opening an account.
- Chase Sapphire Preferred® Card. sixty thousand Chase Ultimate Rewards® points following a three-month period of purchases totaling $4,000.
- IHG One Rewards Premier Credit Card. 140,000 IHG One points following three months of account opening purchases totaling $3,000.
After meeting minimum spending requirements, you’ll have at least 296,000 points or miles from the above cards. You may be able to get several thousand dollars’ worth of travel out of your car purchase, depending on how you use those rewards.
That’s not all. Plenty of credit cards offer incentives for spending a certain amount each year. For instance, every year you spend at least $15,000 on the Hilton Honors American Express Surpass® Card, you’ll receive a free night certificate worth up to 150,000 points. With this certificate, you can stay for free for one night at nearly every Hilton property across the globe, even the $2,000 per night five-star hotels.
| Annual fee | $150 |
| Regular APR | 20.99%–29.99% variable |
- Get twelve Hilton Honors bonus points for every dollar that is charged directly to your credit card at a hotel or resort in the Hilton portfolio.
- 6xEarn 6X points at U. S. restaurants, at U. S. supermarkets, and at U. S. gas stations.
- 4x Earn 4X points on U.S. online retail purchases
- 3xGet 3X points on your card for any additional eligible purchases.
Pros and Cons
- Mid-tier Gold status given with card, which includes F&B credit
- Potential for more valuable Hilton perks
- Up to $200 in annual credits
- Higher annual fee than most mid-level hotel cards
- Credits take effort to redeem
- No annual free night benefit
Card details
- Purchase protection, trip cancellation and delay insurance, and rental car coverage are additional advantages.
Buying a car with a credit card: The downside
There are several reasons not to purchase a car with a credit card, despite the attraction of points and miles in abundance. The primary one is interest According to Brent Jackson, the CEO and founder of Torpago, interest rates on credit cards are typically in the mid-20%% range, making them quite costly. This makes them an unsuitable form of credit for long-term financing.
It’s true. America’s average credit card interest rate is 20. 68% (often higher among rewards credit cards). If you pay $500 per month for a $20,000 balance on a card that charges 20. 68% APR means that you will have to pay more than $14,000 in interest by the time the card is paid off. This is equivalent to paying twice as much interest as you would if you were paying the average used car loan interest rate, which as of August 202023 ranges from 9% to 12%.
Furthermore, using your credit card to purchase a car will probably cause your credit utilization ratio to soar. If you can pay off your credit card or cards within a month, this should be acceptable. But because of your large balance, if it takes longer than that, your credit score might suffer significantly. Keeping your credit card balances low is key to a good credit score.
Buying a Car With a Credit Card ( Do’s & Don’ts )
FAQ
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