A car probably isn’t at the top of your list of things to purchase with a credit card. But it could be tempting to pay with plastic as a way to rack up more points on a rewards card, or convenient if you don’t want to apply for yet another loan.
Whatever your reasons for considering a credit card for car finance, there are several important factors and limitations to consider. This guide will outline what you need to know about using your credit card to buy a car, and offer some other options so you can find a payment method that suits your circumstances and needs.
Credit Cards with a High Credit Limit for buying cars
Why would you buy a car with your credit card?
There are several reasons why you might wish to buy a car with your credit card. These circumstances include:
- Difficulty getting a car loan. Your current financial circumstances might not be ideal for applying for a new loan. For example, it can be harder to get approval if you’re between jobs or have a lot of existing debt. You may be able to avoid the hassles of applying for a new loan if you have a credit card with a high enough credit limit.
- Promotional interest rates. Perhaps your brand new 0% purchase credit card offers 15 months of interest-free purchasing power on it, which seems much more competitive than the standard rates offered with a conventional car loan. If you manage payments well, it could even allow you to avoid paying any interest on your credit card.
- Split costs. If you have some cash stashed away for the new wheels, but are just a little bit short, your credit card could help cover the difference.
- Immediacy. If your current car is broken down or you’ve seen a great deal that’s only available for a limited time, a card could allow you to get the car you want straight away.
- Rewards. This is another popular reason for using a credit card at the car dealer. If you have a frequent flyer credit card that offers 1 point per $1, for example, you could earn a free flight by paying for your car. This can be highly rewarding, as long as you don’t end up paying interest fees exceeding the value of your reward or points earned.
What you should consider before buying a car with your credit card
While there can be benefits to paying for a car with your credit card, here’s what you need to weigh up before pulling out the plastic:
- How much will the car cost? It’s usually only viable to use a card for lower-cost, used cars. Most car loan options start at around $5,000, so if the car you want is less than this then your finance options may be narrowed down to a credit card, personal loan or savings.
- What’s my credit limit? Naturally, you will only be able to charge any purchase on your credit card up to its credit limit. You could also consider asking for a credit limit raise if your credit score is healthy, or charging the car to several credit cards.
- How much can I afford to regularly put towards the debt? Draw out a repayment plan before you commit to making a large purchase like this. Carrying a large balance on your credit card should generally be avoided. If you’re taking advantage of a 0% or a very low purchase interest rate, calculate how you can pay it off before you promotional period ends and consider what standard interest rate will apply if you have a balance remaining. Some 0% purchase options last between 3 to 15 months, so if it's going to take over a year to pay off, a car loan will probably be a less expensive option.
- Will there be a surcharge? Some sellers could apply a surcharge to your credit card payment, typically between 1.5% and 3% of your transaction value (or more depending on your card type). To put this into perspective, a 3% surcharge would cost $300 on a $10,000 purchase. Note that car loans also involve a flat application fee between $120 and $378, albeit for larger loan amounts.
- Should I let my credit card provider know? Sometimes large transactions on your credit card account could be flagged by fraud monitoring services. If you’re concerned about this, you can contact your credit card provider ahead of time to let them know it is a planned purchase.
- How will this affect my cash flow? If you plan to use most or all of your available credit on the car, then any direct debits or other regular payments may no longer be possible on your credit card. Also note that you may not enjoy interest-free days on new purchases while carrying an outstanding balance on your credit card.
Other financing options for buying a car
Apart from using your credit card, you may also want to consider the following options:
- Car loans. In general, car loans offer more affordable interest rates than credit cards over longer periods of time. You can easily find loans offering interest rates below 10% over 1-7 year loan terms, which may have a lower impact on your cash flow and interest expenses over time.
- Personal loans. You may also wish to look into personal loans, which typically offer more competitive standard interest rates than your credit card. Personal loans can be secured or unsecured, and will also likely have a lower impact on your finances over time than a credit card debt.
- Savings. If you can wait for it, the best thing to do would be to pay for your dream car in cold, hard cash. Of course, you could still choose to pay with your rewards credit card to earn rewards, but the point is to avoid paying any interest fees whatsoever on your new set of wheels. Consider earning interest on your hard-earned money instead with a savings account.
Buying a car with a credit card vs. a personal loan
Jonathan is looking at buying a used car for $6,000. He’s considering the following financing options for his purchase:
| Product | Interest rate | Term | Monthly repayments | Surcharge/ Loan application fee | Total cost |
|---|
| Car loan | 10% p.a. | 2 years | $277 | $195 | $6,840 |
| Credit card | 13% p.a. | N/A but planned for repayments over 2 years | $282 | $180 (3%) | $6,953 |
Based on a two-year repayment period, paying for his new car with a credit card costs only $113 more than the car loan option. Jonathan decides to use his credit card because his credit limit is $10,000 and this purchase will not drastically affect his cash flow. Also, since he has a frequent flyer credit card that offers 1 point per $1 spent, he will earn 6,000 points for this purchase that could help offset the cost of financing.
Paying for a car with your credit card may or may not be the wise thing to do – it really depends on your circumstances. When weighing up your options, remember that interest fees can snowball over time and you should try as much as possible to avoid getting caught in the debt trap. It may sometimes be better to defer gratification than to end up paying way too much for a car because of interest fees and surcharges.
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