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Ah, it’s time to go through the hassle of buying a new car. Maybe you loaned your existing car to a friend and he drove it into a lake. Maybe your old van’s 12 mpg isn’t cutting it anymore. Whatever the case may be, the time has come to haggle with dealers and hope that your chosen vehicle wasn’t made by a retiring employee with a vendetta. Regardless of how it turns out, you may as well get some rewards for your purchase, right?
Instead, you can coax many dealers into letting you pay for some or all of your down payment with your rewards card. Auto dealerships typically limit credit card purchases to anywhere from $1,000 to $5,000. Regardless of their stated cap, it never hurts to ask for more.
But, on an everyday, point A to point B type vehicle, you can probably put your entire down payment on your rewards card through some dealerships.
Suppose that you are in the market for a regular automobile. In other words, you are not the starting point guard for a major professional basketball team and are not projected to be the first pick in the upcoming NFL draft.
Let’s say that you go with a 2016 Honda Civic LX. According to Kelly Blue Book, the out of the door price of this car is $20,266.
Now, let’s assume that you find a dealer who will accept a maximum of $4,000 in credit card payments.
You decide to take full advantage of this on your rewards card. We’ll assume that you will earn 1 point or mile per dollar spent, as I do not know of any cards that have a bonus category to buy automobiles with.
Right off the bat, you’d earn 4,000 points or miles! And, if you take out a new rewards card for the purchase, you can even earn the signup bonus from just one purchase.
Should You Use Your Rewards Card For a Down Payment?
This all depends on how much you trust yourself to pay back the full balance on time.
If you place that $4,000 down payment on your credit card and earn 1 point per dollar spent, you’ll effectively earn 1 percent back on your purchase. If that card comes with a 0 percent introductory period, then it won’t be a big deal if you don’t pay the bill off on time.
However, any card that has an interest rate on purchases will make this purchase counterproductive. Just imagine paying 15 percent interest and earning 1 percent back. You’d basically be signing up to pay an extra 14 percent on your down payment, only this amount would go to your credit card issuer as opposed to the Auto dealer.
Beware: Over 80 percent of those who put all or part of their down payments on credit cards do not pay it off within 90 days. Remember, your issuer will likely assess interest well before 90 days after your purchase, meaning that the odds are overwhelmingly against you if you decide to go this route.
How To Beat the Odds and Rake in Rewards
With the mentioned facts, you may be a bit leery about paying a down payment with a credit card. However, there is a simple way to beat the odds.
If you’d rather pay with cash or a check, then you could just set those funds aside to pay your credit card balance with. Taking our example of a $4,000 down payment, you could pay this with your rewards card and earn 4,000 or more points on it, assuming that it offers at least 1 point (or mile, etc.) per dollar spent. Meanwhile, you could stash the $4,000 that you were going to fork over to the auto dealership in a bank or money market account. Then, after you’ve already earned your rewards, pay the credit card bill on time with the $4,000 to avoid paying interest, making this a winning situation.
Purely using a credit card to make a down payment on a new card and crossing your fingers is not a good idea. The odds suggest that this won’t work out in your favor.
Still, you can beat the odds in the mentioned way or by devising a plan of your own. Just be sure that you can pay your credit card bill on time to avoid paying more interest than your rewards are worth when you use your card for a down payment.