Chris Bridges, Founder and CEO, VITAL Card Inc.
Using a credit card, you can easily purchase the things you need without having to wait for your paycheck to deposit into your bank account — as long as you make monthly payments. In fact, using a credit card is kind of like borrowing from future paychecks.
Between paying your monthly rent and annual taxes, credit cards have a lot of purchasing power. But can you buy a car with a credit card?
Before whipping out your plastic and swiping away, it’s important to know what you’re getting yourself into. It’s important to make an informed decision and thoroughly understand the potential benefits and drawbacks of financing a car with a credit card.
Ultimately, these factors can either save or cost you money. Let’s dive in and explore whether this approach to auto financing is a smart move.
Can You Buy a Car with a Credit Card?
The answer is yes, but it’s not always as simple as swiping your card at the dealership. Depending on the type of card you have, you may not be able to finance the entire purchase even if you have enough available credit.
This is because only a limited number of car dealerships accept credit card payments for the full amount of the vehicle. Most may process a credit card transaction for the down payment or merely part of the full purchase price.
Credit card processing fees can reach up to three percent, which can add up for large expenses. For instance, using this percentage, a car worth $50,000 could rack up $1,500 in processing fees alone.
Additionally, credit cards also come with high interest rates. With an average annual percentage rate (APR) of 16.65%, the costs can quickly become overwhelming if you are not able to immediately pay off your balance.
No matter which type of credit card you use, read the fine print carefully before committing to this financing method. Pay close attention to any restrictions or fees involved, as well as interest rates that may apply after a promotional introductory period ends.
Once you understand the card terms and conditions associated with using your particular credit card to buy a car, you can determine whether it’s the right financial move for you.
What Are the Downsides of Using a Credit Card To Buy a Car?
Most cards carry a credit limit on how much you can spend, so if you’re planning to purchase a high-end vehicle, you may need to use multiple cards. This can be complicated, and the seller may charge additional fees for each card used.
Many interest rates for credit cards are variable and can increase over time, potentially making it more expensive to pay off your car purchase than if you had paid with cash or a loan. This can add hundreds or even thousands of dollars to the cost of your car over time.
Another risk to consider is the impact that financing a car with a credit card can have on your credit score. Carrying a large balance on your credit card each month to month can adversely impact your score by increasing your credit utilization rate.
Credit utilization gives potential lenders insight into how much of your available credit you’re using compared to your total credit limit. For example, if you have a credit card with a $1,000 limit and you spend $500 in one month, your credit utilization would be 50%.
The major credit reporting agencies also use this rate to calculate your credit score, along with other factors like the length of your payment history and the average age of your credit accounts.
Additionally, by missing a payment or making a late payment on your credit card, you could be subject to additional fees from your credit card issuer. As a result, you may see your credit score drop, especially if you also had to max out your credit card.
It’s also worth noting that some dealerships won’t accept credit cards as payment for cars due to merchant fees and additional paperwork requirements, so check with your dealer before assuming that this option is available.
What Are the Advantages of Buying a Car With a Credit Card?
Depending on the dealership, a credit card can allow you to quickly finance a new vehicle. Many credit card companies offer instant approval for a credit card, meaning you can use it as soon as you receive your account information and locate the right car.
Plus, many credit cards offer cash back, travel rewards, or other incentives for using your line of credit as a purchase method. If you’re working toward specific rewards such as airline miles or cash back, then using your card to purchase your car can help you reach those goals faster.
Additionally, you have the opportunity to build up your credit score by leveraging your credit card. By making your payments on time and in full, you may be able to improve your credit score and potentially get better terms on future loans.
A credit card can also provide you with certain protections that cash doesn’t offer. For example, if you use a credit card to buy a car and the car turns out to be defective, you could dispute the charges with your credit card company and get your money back.
And if you have an excellent credit score, you may also qualify for a rewards credit card with an introductory 0% annual percentage rate (APR), allowing you to make interest-free payments for a fixed period of time.
If you choose to go this route, just make sure that you can pay off the balance before your introductory period ends. If not, the interest will quickly pile up.
For instance, a national average APR of 16.65% on a $5,000 balance can add $832.50 to your total balance in just one statement cycle.
How Can You Maximize Rewards When You Use a Credit Card to Buy a Car?
Risks notwithstanding, financing a car with a credit card can help cardholders make use of their card’s cash back or other rewards programs.
Here are a few tips to help you maximize those rewards.
Compare Credit Card Rewards
Take ample time to research and examine the different credit cards available, as well as their respective terms and rewards programs. Keep an eye out for cards that offer a higher-than-average number of reward points or cash-back percentages.
Take Advantage of Signup Bonuses
For some rewards cards, you could be eligible for signup bonuses or promotions if you spend a certain amount within the first few months after being approved for the card.
Leverage these offers by spending enough on your car purchase to get the bonus. This bonus can be a fantastic way to offset some of the upfront cost of buying your car with a credit card.
Track Your Spending
Managing your spending is critical when using a credit card, especially when making a lofty purchase like a car. This means staying on top of your month-to-month payments.
Plus, watch out for interest rate increases — which is common with variable APR — or any sudden changes in the card’s terms and conditions. These factors can drastically impact the amount of cashback or rewards earned, so it literally pays to stay vigilant.
How Else Can You Finance a Car?
If you don’t have a stellar credit score, or if you have none whatsoever, then financing a car with just your credit card may not be the best option for you. Fortunately, there are a few other options that can work.
Generally, these alternatives involve applying for a loan from a lender. For instance, many dealerships offer their own financing programs, which often provide assistance for a wide range of credit histories.
If you qualify and secure financing through the dealership, they may even be able to issue you an extended warranty or other incentives to add value to your purchase.
Another option is to apply for personal loans from online lenders. This type of loan usually involves making fixed monthly payments, and it can be tailored to fit your budget. Some loans even allow you to avoid a costly down payment, although they often come with a high APR.
While these lenders may accept borrowers with fair or even poor credit, these high APRs can often worsen the borrower’s financial situation. High payments and compound interest rates can create more financial stress, and a missed payment can cost you hundreds of dollars.
At the end of the day, the ideal auto financing method should fit into your budget comfortably, allowing you to manage monthly payments over time without putting undue strain on your finances or credit score. After all, buying a car should bring you freedom — not stress.
The Bottom Line on Financing a Vehicle With a Credit Card
So, can you buy a car with a credit card? While it might be tempting to try and purchase a vehicle with your credit card, you’ll want to consider the drawbacks before you take the plunge.
Based on your credit score and card limits, you may find it difficult to buy an expensive car with just a credit card. Not to mention, locating a dealership that accepts pure credit for a vehicle is a challenge in itself.
It’s also important to take into account the interest rate you’ll pay, as well as any additional fees charged by the dealership. Then, assess whether or not the potential credit card rewards are worth it.
Regardless of the route you take, research your options thoroughly to find the best deals before signing on the dotted line. After all, buying a car is an investment you’ll want to be sure you can afford and enjoy for years to come.
Here at VITAL Card, we understand the importance of sharing and spending responsibly. Our credit card offers generous cashback rewards, as well as access to your VITAL score. While not an official credit score, your VITAL score can help you learn more about your finances and support healthy financial habits.
To learn more about VITAL Card, visit our website.
VITAL Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.