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If you have good credit, or a really long credit history with a specific bank, you may have a credit card with a $20,000 or more credit limit. You may joke that your credit limit is enough to buy a car.
But have you actually considered the possibility? There are two questions to consider regarding buying a car with a credit card:
1. Is it a good idea given your current financial situation?
2. Is it possible to do so?
Let’s address the second question first. The answer may surprise you.
Dealers may balk at the fees they’ll have to pay when you whip out the credit card to pay for your new sedan — but based on credit card policies, they must allow it. We talked about this in reference to “smaller-than-average purchases” (a pack of gum at your local convenience store), but the same rules apply. It’s the 39-to-59-cents or so transaction fee that gets retailers when you make small purchases with a credit card. In the case of a car, those 2-to-3 % of transaction charges are the real killer to dealers. But, if you make enough of a fuss about it (just like with the pack of gum), and point out credit card policies to your dealer, most are likely to give in.
But here’s the catch. Unlike a pack of gum, prices on automobiles are negotiable. If you want to pay by credit card, it could weaken your bargaining position. The dealer will be thinking about that 2 to 3 percent they’re losing on the sale.
You may get a better price, overall, if you make a cash down payment and use conventional car loan financing for the balance. (Or, ideally, you will have enough money saved that you can pay cash for your car.) In most cases, the form of payment is part of the contract and discussed during negotiation.
Knowing that you can buy a car with your credit card — even though you may have to convince the dealer — it’s time to evaluate your financial situation, interest rates, and rewards to determine if you should.
First, compare interest rates on conventional financing with the interest rates on your credit card. In fact, you may be able to use this bargaining point to negotiate 0% dealer financing for a certain amount of time.
The only time it pays to charge a car on a credit card is if you have 0% financing and can pay off the car (or get conventional financing) before your 0% interest offer ends. Basically, this means that you already have the cash-in-hand to pay for the car, (or close to it) don’t need financing, and are just charging the automobile in order to get some big-time rewards.
If that’s the case, calculate how much cash you’ll earn in rewards. With this number in mind, ask the dealer how much of a discount he’ll give you if you pay cash instead. If he can match the amount you’ll earn in rewards, pay cash. There’s no reason not to.
If you don’t have cash in the bank to cover your purchase, buying a car with a credit card is a huge leap of faith. You’re taking a bet, with a large amount of money and your credit rating, that you’ll have the money to pay for the car before your 0% interest offer runs out.
If you can’t make the minimum payments or pay off your car at zero percent interest, you could be facing:
- A dip in your credit score because you’ll have a credit card with a very high debt-to-available-credit ratio
- Minimum payments you may not be able to make
- A ruined credit rating
- A large credit card payment — and no car — if something should happen to your car.
In the event of an accident, your car insurance will reimburse you what your car is worth — and you’ll likely need that money to buy a new car. Gap coverage won’t cover the amount you owe on your credit card, but if you took out a car loan, gap coverage would cover the difference between your car loan and the value of your car. Could you afford a hefty credit card payment plus a new car payment if your car was totaled in an accident?
Have some cash on hand for a down payment, and hate to see all those potential credit card rewards going to waste? You can always put your down payment on a credit card. Most dealers won’t balk at this, because the amount is lower than the full price of the car. And at 3% rewards, available on many excellent rewards credit cards, you could use that cash back reward in any number of ways — including a trip in your car!