The dream of owning a new car often comes with the hefty reality of its price tag. With the average new vehicle costing around $50,000 and even used cars averaging about $30,000, understanding your payment options is crucial. If you’re exploring different ways to finance your next vehicle, you might be wondering, “Can I Purchase A Car With A Credit Card?” and more importantly, “Should I?”. Let’s delve into the intricacies of using credit cards for car purchases to help you make an informed decision.
The Possibility: Buying a Car with a Credit Card
The simple answer to whether you can buy a car with a credit card is: potentially, but it’s not always straightforward. While car dealerships commonly accept major credit cards for various transactions, including service and parts, using a credit card to cover the entire purchase price of a vehicle is less common and often subject to dealership policies.
Dealership Policies and Credit Card Fees
The primary reason dealerships hesitate to allow full car purchases on credit cards boils down to transaction fees. Credit card companies impose fees on businesses for each credit card transaction they process. These fees typically range from 1.5% to 3.5% of the transaction amount.
Consider purchasing a $50,000 car with a credit card. A dealership would incur fees ranging from $750 to $1,750. For luxury vehicles or trucks with higher price tags, these fees can escalate significantly. A 3.5% fee on a $100,000 vehicle amounts to a substantial $3,500, directly impacting the dealership’s profit margin.
Negotiating Credit Card Payments and Fees
If you are determined to use a credit card for the full car purchase, negotiation with the dealership might be possible. Tools like online price checkers can help you assess if you’re receiving a fair deal. Once a final price is agreed upon, you could attempt to negotiate with the sales manager to allow credit card payment. However, be aware that dealerships might pass the credit card transaction fee on to you. Regulations regarding passing these fees to customers vary by state, so it’s essential to understand the local laws.
Even if legally permissible, dealerships rarely pass credit card fees to buyers. Expecting this option at every dealership is unrealistic. Furthermore, absorbing this fee would increase your overall car cost, potentially by thousands of dollars. Starting your car ownership journey with a significantly larger debt than anticipated is generally not advisable.
Partial Credit Card Payments
If a full credit card purchase isn’t feasible, dealerships might permit partial payments via credit card. This could involve charging a portion of the vehicle’s price or using a credit card for the down payment. While there’s no fixed percentage for a car down payment, 20% is a commonly suggested figure. Applying a 20% down payment to a $50,000 car means you could use your credit card for a substantial $10,000.
Alternatively, dealerships might allow you to charge service plans or associated fees on a credit card, keeping these costs separate from the main car loan. If any of these credit card options appeal to you, it’s crucial to confirm the dealership’s policy before committing to a specific vehicle.
Used Cars and Credit Cards: Are They Different?
Used cars typically come with lower price tags compared to new vehicles. Lower transaction amounts translate to smaller credit card processing fees for dealerships. Therefore, negotiating a credit card payment for a used car purchase might be slightly more attainable than for a new car. However, it’s still not guaranteed, and dealerships may still request you to cover the credit card transaction fee. The same considerations and potential fees apply to used car purchases as with new cars.
The Financial Wisdom: Should You Use a Credit Card for a Car?
Beyond the “can,” the more critical question is “should” you buy a car with a credit card. Whenever credit cards are involved, understanding the terms and conditions, especially the interest rate, is paramount.
High Credit Card Interest Rates: A Major Drawback
Credit card interest rates can be significantly higher than those for traditional auto loans. Average credit card interest rates have seen peaks, sometimes exceeding 20%. Financing a car purchase on a credit card with such high interest can be very costly.
For instance, charging $25,000 (less than the average used car price) on a credit card with a 20% interest rate and paying it off in $1,000 monthly installments would take approximately 32 months and accrue around $7,000 in interest. This means the total cost for the car would inflate to $32,000. Lower monthly payments or only making minimum payments would drastically extend the repayment period and exponentially increase the total interest paid, potentially exceeding the original car price.
Comparing Credit Card vs. Car Loan Interest Rates
Traditional car financing typically offers much lower interest rates than credit cards. While your credit score influences the rate you’ll receive for both credit cards and car loans, auto loan rates are generally more favorable. For new car loans, average rates can be around 7%, and for used cars, approximately 11%. Thorough research, comparison shopping across dealerships and banks, and choosing a car that fits your budget are crucial steps in responsible car buying.
Moreover, dealership financing might unlock manufacturer incentives that are unavailable with alternative financing methods. These incentives can translate to substantial savings on a new car purchase.
Credit Card Rewards and Incentives: Tempting but Tricky
Despite the interest rate concerns, using a credit card for a car purchase can seem appealing due to rewards programs. If you can repay the balance quickly and have the right credit cards, there are potential benefits to consider.
Earning Rewards Points and Miles
Many credit cards offer rewards such as points, airline miles, or cash back for every dollar spent. A large purchase like a car could yield a significant amount of rewards, especially if you have a card with a generous rewards program. This could translate into travel perks, cash rebates, or other benefits depending on your card.
0% APR and Promotional Rates
Some credit cards feature introductory periods with 0% or low APR (Annual Percentage Rate). If you can pay off the car purchase within this promotional period, you could potentially save a considerable amount by avoiding interest charges altogether. This strategy requires disciplined repayment and careful planning.
Hidden Fees and Fine Print
However, credit card rewards and promotional rates come with caveats. Cards with attractive rewards often have annual fees that can offset the rewards earned if spending isn’t high enough. Promotional 0% APR periods are temporary, and failing to repay the balance before the period ends can result in very high post-promotional interest rates. Carefully reviewing the fine print and understanding all associated fees and terms is crucial before making a decision based on rewards or promotional rates. Buying a car with a credit card for rewards is a potentially rewarding but risky strategy best suited for financially disciplined and savvy buyers.
Impact on Your Credit Score: What to Consider
Even if you find a dealership that accepts credit card payments and you’re confident about managing the repayment, there are still credit score implications to consider.
Credit Limit and Utilization Rate
Credit cards have spending limits. Your credit limit is the maximum amount you can charge on your card. A car purchase, even a partial one, might exceed your credit limit, requiring you to request a credit limit increase from your credit card issuer.
Furthermore, charging a significant amount to your credit card impacts your credit utilization rate. This ratio represents the percentage of your available credit that you are currently using. A high credit utilization rate, even if temporary, can negatively affect your credit score. Credit bureaus view high utilization as a sign of increased risk.
Potential Credit Score Impact
Using a credit card for a car purchase, especially a large portion, can lead to a temporary dip in your credit score due to increased credit utilization. This impact is usually temporary, and your score should recover as you pay down the balance and reduce your utilization rate. However, if you are planning to apply for other credit in the near future, such as a mortgage, this temporary dip could be a factor.
Smarter Alternatives to Credit Card Car Purchases
For most car buyers, especially those without the capacity to repay a large credit card balance quickly, alternative payment methods are generally more sensible and financially sound.
Cash Payments
Paying cash for a car is financially the most advantageous option, as it avoids interest charges and debt accumulation. However, for most people, saving up the full purchase price of a car in cash is not feasible.
Traditional Auto Loans
Traditional auto loans, obtained through banks, credit unions, or dealership financing, remain the most common and often the most cost-effective way to finance a car. Car loans typically offer lower interest rates, structured repayment plans, and can be tailored to your budget and credit situation. Utilize online auto loan calculators to estimate monthly payments, factoring in sales tax, down payment, and trade-in value for an accurate assessment.
Leasing a Car
Leasing is an alternative to buying, offering lower monthly payments and often requiring a smaller down payment. However, leases come with specific terms, including mileage limitations and restrictions on vehicle modifications. Understand the lease agreement thoroughly before choosing this option.
Co-signing for Bad Credit
If you have poor or limited credit history, securing a car loan can be challenging. A co-signer with good credit can improve your chances of loan approval and potentially secure a better interest rate. However, co-signing is a significant responsibility for both parties involved.
No matter the financing method you choose, consistently making timely car payments is crucial. Responsible repayment habits help build your credit score, providing more favorable financing options in the future when you’re ready for your next vehicle.
In conclusion, while purchasing a car with a credit card is possible in some situations, it’s generally not the most advisable route for most car buyers due to high interest rates and potential fees. Exploring traditional auto loans and other financing alternatives is typically a more financially prudent approach to car ownership. Carefully weigh the pros and cons, assess your financial situation, and prioritize making an informed decision that aligns with your financial well-being.
