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If you want to earn credit card rewards for your spending—and you can pay off the balance in a month or two—it could be a wise move that could reap big rewards. But it’s a bad idea if you can’t afford a car and don’t want to apply—or don’t think you’ll qualify—for an auto loan. Downright terrible, in fact.
So before you lace your shoes and head to the dealership, plastic rectangle in hand, it’s crucial to weigh the pros and cons of this purchasing scenario. Doing so could save you a headache—and a whole lotta money.
Do car dealerships take credit cards?
Car dealerships can accept payment by credit card—but not all do.
There’s a perfectly reasonable explanation for this. “If [I’m] a car dealership and I want to sell a $50,000 car…it may cost me $1,500 just to accept that payment,” says Walt Levengood, vice president of strategy and revenue at NAV. “The person selling the car has to be able to eat this cost.”
Walt’s referring to a processing fee. When you pay a merchant with a credit card, it is responsible for paying a processing fee charged by the card issuer. These fees generally range between 1.5% and 3.5%. It’s usually worth it for stores to eat this fee, as giving customers the option to pay with a credit card undoubtedly results in more business. But a car dealership is probably not in the mood to pay a 3.5% processing fee for a purchase amounting to tens of thousands of dollars.
Still, you may find car dealerships willing to swipe your card. Some may allow you to make at least the down payment, while others might let you split your payment between card and cash. And you might find a unicorn: the dealership that will let you pay for the whole thing with your credit card.
If you’re dead set on buying a car with a credit card (there are a few great benefits, as we’ll see), you can make it a topic during the negotiation process. If you’re willing to bear the cost, you might even request that the dealership add some (or all) of the processing fee to your bill.
Buying a car with a credit card: the upside
If you’re planning a large purchase, you can get some pretty amazing value by funneling that expense through a credit card.
Most obviously, you can earn lots of rewards for that spending. Using a card like the Wells Fargo Active Cash® Card, which earns 2% back on all purchases, would give you an effective rebate of $400. Not bad, but it’s probably only worth it if you don’t get stuck with the processing fee. However, you can supercharge your rewards by grabbing a welcome bonus (or three).
As an example, let’s say your car purchase is $20,000. You could split the payment across multiple cards and easily earn bonuses** from:
- Capital One Venture Rewards Credit Card. 75,000 Capital One miles after spending $4,000 on purchases within the first three months from account opening
- Chase Sapphire Preferred® Card. 60,000 Chase Ultimate Rewards® points after spending $4,000 on purchases within the first three months from account opening
- IHG One Rewards Premier Credit Card. 140,000 IHG One points after spending $3,000 on purchases within the first three months from account opening
**Offers valid as of September 29, 2023. Terms apply and are subject to change at the issuer’s discretion.
After meeting minimum spending requirements, you’ll have at least 296,000 points or miles from the above cards. Depending on how you use those rewards, you could squeeze several thousand dollars in travel out of your car purchase.
That’s not all. Plenty of credit cards offer incentives for spending a certain amount each year. For example, the Hilton Honors American Express Surpass® Card awards a free night certificate (worth up to 150,000 points) each year you spend at least $15,000 on the card. This certificate can get you a free night at almost any Hilton hotel worldwide—including five-star resorts that cost $2,000+ per night.
Buying a car with a credit card: the downside
Despite the allure of points and mile galore, there are plenty of reasons not to buy a car with a credit card—the first being interest. “Interest rates on credit cards tend to be in the mid-20% range—so pretty expensive, and not the best form of credit [for long-term financing],” says Brent Jackson, CEO and founder of spend management platform Torpago.
It’s true. America’s average credit card interest rate is 20.68% (often higher among rewards credit cards). If you pay $500 per month for a $20,000 balance on a card that charges 20.68% APR, you will end up paying over $14,000 in interest alone by the time you pay the card off. That’s double or more the interest you’d pay with the average used car loan interest rate, which ranges between 9% and 12% as of August 2023.
Additionally, buying a car with your credit card will likely make your credit utilization ratio skyrocket, which should be fine if you can pay your card or cards off within a month. However, if it takes longer than that, your credit score could take a significant hit due to your high balance. Keeping your credit card balances low is key to a good credit score.
Pros and cons of buying a car with a credit card at a glance
Pros
- Earn lots of credit card rewards. If you’re using a rewards credit card, your spending will accrue a lot of cash back, airline miles, or hotel points.
- Achieve spending incentives. Some credit cards reward you for meeting specific amounts of spending each year.
- Potentially 0% interest (briefly). You can use a credit card that offers 0% intro APR to avoid interest for up to 21 months.
Cons
- High interest rates. If you can’t pay off your credit card balance in a month or two, you’ll pay a sky-high APR that’ll almost certainly negate the rewards you earn.
- Increased credit utilization. Putting a large purchase on your credit card can increase your amounts owed to a level that hurts your credit score.
- You may have to pay the processing fee. The car dealership may charge you a fee to diminish their losses for accepting a credit card payment.
Alternatives to buying a car with a credit card
Instead of using a credit card to buy a car, you have plenty more “traditional” options to finance the purchase or get approved for a loan.
Financing
Getting an auto loan is often the best route to purchasing a car if you can get it. The interest rates are often significantly lower than credit card APRs. Plus, a car loan can even benefit your credit score by improving your credit mix, which considers the different types of credit accounts you have—mortgages, credit cards, auto loans, personal loans, and so on.
Get a co-signer
If you don’t think you’ve got the credit strength or score to get approved for an auto loan, it’s worth asking a trusted family member or friend to co-sign your loan. You’ll have a much better chance at approval, and your interest rate will likely be more favorable.
Trade in your current car as a downpayment
If you’re considering using a credit card to fund a purchase you can’t afford, you shouldn’t do it. However, if you have a car you want to trade in, you could knock thousands of dollars off your total cost. That’s because when you trade in a car, your total purchase cost will only be the difference between the cost of the car you’re buying and the credit for your trade.
The takeaway
Some car dealerships may accept a credit card payment for some or all of a car’s asking price, but many will not. And even if they do, you may be asked to pay a convenience fee between 1.5% and 3.5%, which can add to your total costs.
If you’d like to earn rewards, welcome bonuses, or other credit card incentives from a car purchase, be sure to pay off the entire purchase before you’re subject to interest charges. The average credit card APR in America is currently over 20%—meaning it can be tough to get out of debt if you find yourself with a high balance.
