Can You Buy a Car With a Credit Card?

Even though your credit card has a $15,000 credit limit, does it mean you should use it to buy a shiny new car?

Probably not. An auto loan will almost always have a lower interest rate than a credit card. But some people who already have the cash to pay for a new car and just want to earn credit card rewards points may consider charging the car to their card, then paying off the card immediately and cashing in.

Unfortunately, the option of putting your car on a credit card isn’t quite so easy, and probably isn’t an option in most dealerships.

Dealers aren’t anxious to let their customers charge their vehicle purchases and one reason is the fees the car dealer has to pay when you use the card.

At a time like now, when dealers are motivated to unload last year’s models, prices — and profit margins — drop. So when a dealer offers you a deal in which it will barely break even, and you whip out a credit card, the dealer may be looking at a loss. Edmunds.com Senior Editor Matt Jones explained: “An average deal will have about 6% of the selling price as gross profit (the number the dealer makes before costs and commissions). At the same time, credit card companies can charge up to 4% transaction fees, eating up nearly all the profit. Heaven forbid a deal is sold at a loss, and then add an additional 4% of the selling price charge on top? On a $25,000 deal, it would cost the dealership as much as an additional $1,000 to allow a deal to be purchased on a card.”

A second reason is because consumers have chargeback rights with credit cards. You think you got a lemon? You can dispute the charge. And the dealer may not have the opportunity to make it right, as with lemon laws. The risk to the dealer can be substantial. “This happened at a dealership I worked for once upon a time,” Jones said. “We accepted credit cards for full purchases. We sold an [Honda] S2000, and the buyer later claimed that the vehicle purchase was fraud, and he didn’t authorize the payment. If I recall correctly, the charge was reversed. We didn’t get paid, and we were out of an S2000.”

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So if your card isn’t welcome at the sales lot, why is the service department so willing to take it? After all, sometimes the charges there are high, and the dealer must pay transaction fees there, too. Jones said the reason is because the profit margin is much higher in the service department.

Are Times Changing?

Many dealers are coming around to a compromise on plastic, though: accepting a credit card for a down payment, often with a maximum of between $2,000 and $5,000, is more common. If you have the money in the bank and can immediately repay it to avoid interest charges (which are often high on reward cards), a credit card down payment could put a few dollars back in your pocket. You can use a cash-back credit card, or add miles or points to your account balance. American Express partners with TrueCar in a car-buying program that allows customers to put at least $2,000 of the car price on an American Express card, and there are programs for new and used cars.

Mike Rabkin, owner of From Car to Finish, a new-vehicle negotiating service, said that’s what he did. “I charged $5,000 on my last car (the limit they allowed), and got 2% back in cash — so (I) earned $100 for doing it this way rather than with a check,” he said in an email. A possible caveat: If a charge of this size would bring your credit usage up to more than 30% of your credit limit, it could hurt your credit score. A solution? Pay off the purchase online immediately.

But before you worry about the best way to pay for your next ride, it’s important to check your credit and get it in the very best shape you can. Because in general, the higher your credit scores are, the less interest you will be charged, and the lower your payment will be. You can take a look at two of your credit scores, plus get a personalized analysis of your credit profile, for free at Credit.com. In addition, you should take a look at your credit reports (here’s how to see them for free), to make sure the information is accurate, because credit scores are derived from the information in your credit reports.

Finally, it’s a good idea to talk with your financial institution about car financing. While dealers often have loans that are competitive, it’s smart to know about other options. It’s also wise to decide what total price and term you are comfortable with before you walk into a dealership. Otherwise, it’s all too easy to focus more on the payment than overall cost.

And once you’ve covered all those bases, if you can use a rewards card, feel free to go for it. Who wouldn’t want a “free” celebratory dinner?