So you’ve decided to surprise the wife with a new car for Christmas, or maybe you’re just looking to replace that old SUV with something a little more economical. You have everything picked out, but you want to be prepared financially before going to the dealership. You start looking into your options and notice you have an enormous amount of credit left on your Hiliton HHonors card.

You realize that if you charge the car to a rewards card you can probably earn enough for an upcoming vacation, or at least 1% – 2% cash back. Although earning 1 -2% cash back doesn’t sound like a lot initially, it can be a few hundred dollars when purchasing a new car. Can it really be this easy, or are you missing something? The answer really depends on a few factors, the first and most important factor being the dealer.

Although your plan seems flawless from the consumer standpoint, from the dealers standpoint if they allow their customers to pay via credit card they can get hit with an interchange fee of up to 3% by the credit card company. We recently discussed this interchange fee in our Paypal vs Credit Card Fees post, and it really kills the merchant especially those with lower margins.

I think that it’s safe to say that if you’re buying a BMW it’s more likely that the dealer will allow you to pay for a portion of the car via credit card, than say a Hyundai dealer who is going to have a much lower margin on each car sold. I’ve heard of some of the higher end franchises letting customers pay the entire amount on a credit card, but most dealers seem to cap the amount you can charge to a credit card at $5,000 which in my mind is pretty low.

Some dealers even have a cap as low as $1,000, so if you’re planning on putting the majority of your new purchase on your card you definitely want to call around before heading to any showrooms.

With the auto industry still recovering it wouldn’t surprise me if many dealers temporally reduced their cap to improve their margins so that they can outlast the recession.

One possible way to overcome the credit card cap is to use the payment method as a negotiation tactic when haggling over the price. When the dealer comes back to you for the second or third time with the best price they can offer, say “I can do it at this price, but only if I can put the full amount on my card.”

Bringing the issue up now as a deal breaker, instead of later on when arranging payment gives you leverage that you otherwise may have not had. Some dealers still might not be able to do it, but in my mind if you’re going to save a $300, it’s worth a shot.

On a bit of a side note, If you’re looking into getting an auto loan when buying a new car you definitely want to know your credit score before you head to the dealer. Having a good credit score can save you thousands of dollars in interest.

I bought my current car around the same time that a friend bought his car. I walked out with a 0.9% interest rate on my loan (to be fair this was part of a promotion BMW had going at the time), my friend walked out with a 7% interest rate. Although the cars are around the same value he is paying close to $100 more a month of me just in interest, so it having a good credit score really does make a huge difference.

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