Credit cards can be great or terrible, depending on how you use them. Buying a car is a big deal for most people since it’s such an expensive purchase. When you’re going car shopping can you also use a credit card? And, is that even a good idea anyway?
Using credit cards at car dealerships
Putting money down on a car purchase can reduce the amount you need to finance and the amount you need to pay each month. Experian points out that putting more money down could even qualify you for a lower loan interest rate. Can you put your down payment on a credit card?
Different car dealerships have different policies. Some will let you use a credit card for some or even all of your down payment. They do sometimes have a limit on how much can go on a card since they are charged merchant fees on the transaction. These fees can be as much as 1 percent to 4 percent, according to CardRates.com, which cuts down on the small profits dealerships make from sales. Ask your dealer before visiting so you know what the policy is.
You’ll also need to see what the credit limit is on your credit card. Regardless of the amount the dealership permits, you should decide how much credit you have available and how much you’re comfortable putting on your card.
Purchases from a private party, though, likely won’t take a credit card. Loan payments also usually can’t be paid with a credit card, or they have extra fees that make it not worth doing.
Earning credit card rewards
If you have enough savings to pay off your credit card bill when the statement arrives, then putting some of your car purchase on a credit card can be a great way to earn lots of rewards. For example, if you put a down payment of $3,000 on a credit card that gives 1 percent cash back, you’d get $30 back. If your credit card gives 2 percent cash back, then it would be $60. If you have multiple credit cards, then you should pick the one that gives the best rewards.
CardRates.com points out that some cards also have great sign-up bonuses, especially for travel reward cards. If you go this route, choose a card with a sign-up spending requirement that’s less than what you plan to charge for your car.
Paying attention to interest rates
One important factor to keep in mind is that credit cards generally have higher interest rates than car loans do. Therefore, you’ll want to pay off the card statement right away. Otherwise, it will turn into a very expensive way to borrow money that eliminates the cash back amount that you earned.
It is also possible to use a credit card that has an introductory 0 percent APR rate; however, these rates are usually for a limited time. It’s important to have a plan for paying off the amount before the 0 percent interest rate jumps to something much higher. A balance transfer to an introductory 0 percent APR card could be used to pay all or some of a car loan later, but, again, it’s important to have a plan to pay the full transferred amount or it would have made better financial sense to stick with the original car loan. There is usually a 3 percent to 5 percent transfer fee if you decide this route makes sense for you.
How the purchase can affect your credit score
Another factor in putting a large purchase on your credit card is that it could lower your credit score temporarily. It increases your credit utilization ratio all at once, which is the amount spent compared to the total amount of credit available. Experts recommend you keep that ratio under 30 percent.
It’s a good idea to check on your credit score before buying a car anyway if you’re considering applying for a car loan. Improving your credit score before buying the car could improve the loan you’re offered and save you money.
Car dealerships do sometimes take credit. Putting some or all of your car purchase on a card might make sense for you, but only if you’re able to pay it off quickly.