If you're considering a credit card to finance a new car, there are a few things to be aware of before whipping out the plastic.
Many recommend not using a credit card to pay for a car since financing a large purchase like a car with high-interest debt can be very costly. However, there are a few exceptions to this rule.
If you have a credit card with no interest on purchases, you may be able to finance your car purchase and avoid paying interest altogether. It could also earn a stack of rewards points.
Considering using a credit card to buy a car? Check the latest credit card offers first.
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Key takeaways
- Benefits of buying a car with a credit card include potential interest-free periods, earning reward points, and avoiding new credit applications.
- Drawbacks to consider include high interest rates if not managed correctly, credit limits, that some dealers don't accept credit card payments (and may pass on a surcharge if they do).
- If you can't pay with a credit card, third-party payment processors are an option to look into, though they come with their own fees.
Should you buy a car with a credit card?
Buying a car with a credit card is possible. The question is whether it’s a good idea.
The problem is that there is no one-size-fits-all answer. Furthermore, even if you are in the financial position to use a credit card and pay it off without incurring interest (because you have saved up cash or have interest-free purchases for a few months), whoever you are buying the car from has to agree to accept a credit card.
So, should you use a credit card to buy a car? It’s your choice. Don’t rush in if there’s any doubt in your mind about the numbers stacking up. Talk with a financial advisor if in doubt.
Benefits of buying a car with a credit card
There are a few benefits of buying a car with a credit card.
- Possibly interest-free. If you have a credit card with interest-free purchases for a few months, you can finance your car purchase, repay an amount per month, and avoid paying interest altogether. For example, if you had 6 months interest-free and bought a car for $12,000, you could repay $2,000 monthly for 6 months. This would result in you having paid off the debt without incurring interest.
- Earn points. You could earn thousands of reward points if you buy using a credit card with rewards, which could be used to upgrade tickets or book business/first class seats worth thousands of dollars.
- Get cashback. Although there are a growing number of cashback credit cards, very few have cashback on every dollar spent. Depending on the card, you may still be able to either get a percentage of the purchase amount as cashback (up to a maximum amount) or spend enough to trigger a one-off cash voucher.
- No new credit application. If you have to apply for a loan and get declined, your credit score can be damaged. Paying with a credit card you already have avoids this risk.
- Build your credit. Credit cards can help you build your credit history and improve your credit score when used responsibly.
Drawbacks of buying a car with a credit card
There are a few drawbacks to buying a car with a credit card.
- Interest repayments. If your credit card does not have interest-free purchases, the amount you pay after interest could be substantially more than the price you bought the car for. This is especially problematic considering how rapidly cars depreciate in value.
- Your financial position might change. If your financial situation changes before you have repaid the debt, interest will continue to accrue and exacerbate whatever financial problem you may have.
- Surcharges. You may need to pay a surcharge to cover the processing fee if you pay with a credit card, adding to the overall purchase price.
- Not everyone accepts credit cards. Say the dealer or private seller refuses to accept a credit card payment, but you still want to use your credit card and decide to use a third-party payment processor. You will incur an additional processing fee on top of any credit card interest and dealer surcharges.
- Your credit limit might not be high enough. This may mean you can’t buy the car or have to make multiple payments and pay off each one before making the next.
- Increased available credit utilisation. Until the debt has been repaid, your credit utilisation will be high, potentially reducing your credit score.
How to buy a car with a credit card when dealers don’t accept credit cards
There is a way around the problem of dealers that won’t accept credit cards.
- Choose a third-party payment processor. Businesses have several options, including B2Bpay and RewardPay. Consumers/anyone without an ABN have more limited options, but Easy Bill Pay seems to be one of them.
- Open your account. You’ll need to provide your personal information and verify your identity.
- Set up your funding options. This is where you specify where funds are to be drawn from.
- Get an invoice or bill from the seller. You’ll need their bank account details, etc.
- Set up a new transaction. You’ll need to provide details of the recipient, which you can get from the invoice/bill.
- Fund the transaction. The platform will charge your credit card for the amount owed on the bill plus their handling fee.
- The seller is paid. Usually, this happens within a couple of days.
Example scenarios
Spreading the cost
You want to purchase a car priced at $20,000 using a credit card with 0% p.a. on purchases for 12 months. Here's how that might work out.
- The car dealership charges a 2% surcharge for credit card payments, which adds an extra $400 to the car's total cost.
- You decide to go ahead anyway and can commit to repaying the entire $20,400 within the 12-month-long interest-free period ($1,700 monthly for 12 months), thereby avoiding interest.
Earning points
You want to purchase a car priced at $20,000 using a credit card that earns 0.5 points per dollar spent with no caps or tiers and have enough money saved to pay it off in full. Here's how that might work out.
- The $20,000 car purchase nets 10,000 points, enough for a one-way economy flight from Sydney to Melbourne.
- However, the dealership wants to pass on a 2% surcharge, which would cost an additional $400. Weigh this against the value of the points you'd earn, noting that the surcharge itself earns points too.
- You decide to use a third-party payment processor instead of paying the dealership directly because their fee (1% vs 2%) is lower, representing a saving of $200.
- Since you have the cash set aside, you pay the credit card off in full and bank the points.
FAQs
Can you buy a car with a credit card to get points?
If the dealership accepts credit cards, you can earn a large number of points. However, it is not always straightforward. Many dealerships do not accept credit cards because of the processing fees incurred on credit card transactions, which decreases their profits... and as we all know, car dealerships like to make money. Some may only accept a credit card as payment when you agree to paying a surcharge to cover the cost of the processing feel, which can be considerable. If that is the case, you need to weigh up the additional cost against the value of the points earned.
