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Making a down payment or buying a car outright with a credit card may not seem like a great idea. But if you have the cash to pay off the card immediately, it can be a great way to rack up rewards on a major purchase.
To use your credit card for a vehicle down payment or purchase, you'll need to determine whether the auto dealer allows it and, if so, what restrictions they may have. Here's everything you need to know about how to buy a car with a credit card.
Can I Use My Credit Card for the Down Payment?
A vehicle is a major purchase, and putting money down not only reduces how much you owe but also drops your monthly payment—and could even qualify you for a lower interest rate.
Depending on the dealer, you may be able to use your credit card for some or all of the down payment. Dealers may limit how much you can put down with a card because they're charged merchant fees on the transaction and might want to limit their costs.
If you want to use your card to earn rewards on the transaction, ask the dealer before your visit so you know what to expect.
If you're purchasing a car from a private party, though, don't expect to be able to use your card for the down payment. This is because you'll be working directly with a bank or credit union instead of going through a dealership, and financial institutions are less likely to allow such a transaction.
One thing to keep in mind is that just because you can put money down with your credit card doesn't mean you should. In general, it's best to use your card only if you have a rewards credit card and can afford to pay off the down payment when you get your bill.
For example, if you make a $3,000 down payment with the Citi® Double Cash Card - 18 month BT offer, you could earn $60 back on the purchase ($30 when you make the purchase and $30 when you pay it off). It's essential that you pay off the card immediately, though, because credit cards typically charge higher interest rates than auto loans, and you could end up losing any value you gain in rewards.
You may also consider using a credit card with an introductory 0% APR promotion to make your down payment. But if you don't have a clear plan to pay off the balance during the promotional period or if your financial situation changes, you may end up paying much more in interest than if you hadn't used the card.
Can I Make Regular Monthly Payments With a Credit Card?
Most auto lenders don't allow you to use a credit card for monthly payments, and if any do, they may charge you a convenience fee that outweighs the value of the rewards you'd earn.
Of course, if your credit card issuer sends you a balance transfer check in the mail, you could technically use one to make a payment on your auto loan or even pay it off in full. The check acts just like a personal check but is tied to your credit card's credit limit instead.
Keep in mind that even with an introductory 0% APR promotion, you'll typically be charged balance transfer fees, which can range from 3% to 5% of the amount transferred. Also, you may still run into the same problems with interest using a card with an introductory 0% APR for a down payment—if you have a balance remaining when the promotion ends, it could end up costing you more.
In most cases, it's best to avoid using your credit card to make payments toward your auto loan. If you're struggling to make your payment and have a balance transfer check available, it may be a good option compared with not paying at all. But be sure to have a plan in place to pay back the debt before the promotional period ends to avoid a high interest rate.
Can I Purchase a Vehicle With a Credit Card?
It is possible to put an entire vehicle purchase on your credit card, but whether you're allowed to can depend on the dealer's policy and the size of your credit limit. Also, due to the size of the transaction, you may need to get permission from your credit card issuer.
Again, it's important to keep in mind that purchasing a car with a credit card generally makes sense only if you have the cash on hand to pay off the balance. Otherwise, you'll likely end up paying more in interest than you would with an auto loan.
How Buying a Car With a Credit Card Could Affect Your Credit Score
Even if you do pay off your full credit card balance after an auto purchase during your credit card's grace period, the purchase can still impact your credit score temporarily.
That's because such a large purchase would likely cause your credit utilization ratio—your card's balance divided by its credit limit—to spike. How much you owe on your credit card accounts is a big part of your FICO® Score* calculation, and your utilization ratio is a significant component of that. Experts recommend keeping your utilization under 30% to avoid hurting your credit score.
Your credit utilization ratio is calculated based on the balance reported to the credit bureaus by your card issuer at the end of your current billing cycle. So if you pay off the balance before your monthly statement closes, the purchase likely won't affect your credit score at all.
But if you wait until after the statement closes to pay the balance in full, or you carry the balance over the course of several months, it can cause your credit score to drop significantly.
Check Your Credit Score Before Your Vehicle Purchase
Whether or not you're planning to make a down payment with your credit card, it's a good idea to check your FICO® Score to know where you stand.
If your score needs some work and buying a new vehicle isn't a necessity, it may make sense to take some steps to improve your credit in case you need to apply for a loan. Doing so could save you hundreds or even thousands of dollars in interest.