In all the stock photos that reference “credit card” and “car buying,” the subjects are smiling. They probably shouldn’t be. (Getty Images)
Can you buy a car with a credit card? In this post-pandemic, nearly cashless society, that’s a good question. The reasons for doing it are pretty obvious: To “get the miles” if you have an airline credit card, or hotel points, or if your card has a cash-back scheme. So you want to — but can you and should you?
The answer is, it’s possible that some car dealers might allow it, at least for a portion of the purchase such as the down payment. But if they allow it at all, they’re probably going to want to make you pay the processing fee, aka transaction fee, that they’re being charged by the card company — of between 1.5% to 3.5%, typically on the higher end of that. (The convenience of credit card use isn’t free for retailers any more than it is truly free for you.) If you’re buying a $50,000 car, you might have to pay a processing fee of $1,500 or more, and that’s one more expense on top of all the other tax and registration costs you incur in a car purchase. And, dealerships being dealerships, they might even demand a “convenience fee” on top of all that, just to pile on.
We’re not saying there isn’t some dealership out there that will simply let you swipe your card on the full purchase. But it might be owned and operated by Bigfoot. Both things are unlikely.
You have to decide whether a card purchase is worth any of that. Any cash-back scheme a card offers is probably not going to offset the upfront fees you’ll face.
There are other financial penalties to consider: If you can afford to buy the car outright, cash on the barrelhead, maybe that’s one thing. You put it on the card then pay off the balance in a month to avoid paying high interest rates. But if you can’t afford to buy that car outright and therefore can’t pay the card down immediately, it’s going to cost you dearly. Carrying credit card debt can snowball — interest rates on credit cards can be 20% or more, which is double or even triple the interest rate you’d pay on a car loan. Fortune magazine calculates that if you carry $20,000 worth of a car purchase on a credit card, you could potentially pay $14,000 in interest before you get it paid off. That’s a nightmare scenario. If you can’t buy the car outright, don’t even consider putting it on a card.
If you’re taking out a car loan, maybe that’s another matter. You could make the monthly payments via your card — again, provided you can pay off the card balance each month. Otherwise, you’re placing yourself in double jeopardy, paying interest both on the loan and on the credit-card balance. Between both things you’ll pay staggering amounts of interest.
Also, keep in mind that a car purchase on a card amounts to what the credit-reporting services term as a heavy amount of “credit utilization.” It can hurt your credit score.
As with any form of credit, pay down that debt as fast as you humanly can. If you’re using a credit card for … anything, really … strive to pay off the balance each month. If you are taking out a car loan, make as many extra early payments as possible, to pay down the principle and pay off the loan early. You’ll save vast amounts of money.
If you’re really considering filtering a car purchase through a credit card, sit down and really do the math. Study the rewards program of your particular card as well as the APR you’re facing. It’s almost certainly going to look like a bad idea.
