Making expensive purchases with your credit card, especially if you're using a rewards credit card, is often a good strategy. For instance, you might use your card to buy a new fridge. But you can also kick it up a notch and even buy a car with a credit card.
Sound a little crazy? Not at all. In fact, with the right card, it's even possible to save money on your next car by using a credit card. A possible problem, though, is that the car dealers sometimes aren't too excited about accepting plastic to pay for cars. One reason is because they usually end up with a credit card processing fee and this cuts into their profits.
The dealer issue aside, buying a car with a credit card won't work for everyone because there are a few things that must fall into place. Let's take a look at what you need to know and then we'll address the sticky dealer situation.
You Need Excellent Credit
With great credit, you'll qualify for the best credit card offers. Your excellent credit status will also help you get a large credit limit. If you have a pretty high income, that helps, too, with getting a high credit limit.
If you're trying to buy a $4,000 used card for your teenager, then that's easier to pull off. And as mentioned above, the dealer is more likely to accept plastic if the processing fee doesn't soar too high. The fee for a $4,000 charge won't break the dealer, in most cases.
But if you're trying to buy a $25,000 car, you're going to need a high limit to cover that. With a more expensive car, you're also going to have to talk with your salesperson and find out if the dealer will even accept credit cards for a purchase of that size. And if the salesperson balks at the use of your credit card, ask to speak with a manager.
Look For a Zero Percent Introductory APR on Purchases
Here's another situation where excellent credit gives you opportunities. If you get approved for a card with a 15-month zero percent introductory APR on purchases, you can use the card to buy the car.
Calculate how much your payment needs to be each month in order to pay the balance off in 15 months. If you stick to your plan, you'll have your car paid for in 15 months and you will not have paid any interest. So basically, you got an interest-free loan and you've earned rewards, too.
The Downsides of Buying a Car with a Credit Card
In many cases, putting a huge purchase on a credit card will make your credit utilization high. This, in turn, can make your credit score go up. So don't put a car on a credit card if you're planning to refinance your home in the next few months or apply for credit. As you pay down the balance, your score will start to rise if you're limiting purchases on credit and paying all of your bills on time.
Another danger is that you could have a cash flow crisis and end up in debt. A $5,000 balance can get out of control in a hurry. So make sure you have an emergency fund before you use this strategy. Life is just so unpredictable. The last thing you want to do is to pay more for your car than you ever intended to.
Look at Other Options, Too
If you don't have great credit or if you can't get a high credit limit, then look at other ways to finance your car. Interest rates are pretty low right now, so financing through the dealer is even an option. Or you might want to use a site like LendingTree to help you compare auto loan rates.
It's fine to use a credit card if all the pieces fall into place, but it's still a good idea to look at other options to make sure you are making the right decision.