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After totaling her car in an accident, Jordanne Wells didn’t know what to do next.
Wells, who immigrated to the U.S. from Jamaica by herself at 17, had just graduated into the Great Recession from college with a $40,000 tab and multiple maxed-out credit cards, and no longer had a vehicle.
But she needed one to commute to work, so she went to a local dealership to explore her options. She quickly discovered her credit score was in the low 600s — not a very good number — and she couldn’t afford putting a $1,500 down payment on the used 2001 Honda Civic she wanted.
With nowhere to turn, she asked her dad in Jamaica if he could charge the down payment to his credit card, which had a very high APR (or annual percentage rate, the amount you pay in interest) of over 40%. He agreed, and she took out a car loan at an interest rate of 11% to cover the rest.
Wells, now a personal finance expert and founder of Wise Money Women, doesn’t recommend others do the same.
“I was a grown person. I had a job, and I still had to ask my dad to put something on his card. $1,500 might not sound like a lot, but when you have a ridiculous interest rate, it can add up really quickly,” says Wells, who tells CNBC in more detail what she learned from her experience.
Basically, Wells says, just don’t put your car on a credit card.
But Julien Saunders, co-founder of the blog richandregular.com, says he’s all for buying cars with a credit card — only if you have the discipline to pay it off before paying any, or much, interest.
“Credit with the intent to pay it off in cash is a great option because it gives you the ability to reap the benefits of a credit card charge (e.g. purchase protection, reward points) without incurring any interest,” Saunders says.
So if you’re wondering whether buying a car with a credit card is the right move for you, here’s everything you need to know.
Can You Buy a Car With a Credit Card?
Sometimes you just have to finance a car, even when you’re already in debt. That’s what happened to Wells.
You often can pay for your car with a credit card, but it only makes sense if you have the cash to pay it off — or you risk paying an interest rate much higher than what it would cost to finance the car.
“I had zero dollars in savings, nothing at all that I could put down on a car. My dad’s credit card had no points, no rewards. This was a very old school credit card, and the interest rate was astronomical,” Wells says.
Even with a lower interest rate on a card than the 40% Wells’ father was paying — the average credit card interest rate is around 15%, according to the Federal Reserve — you’d still get a much lower rate on a regular car loan. Someone with a high credit score can pay an APR under 5%.
It’s possible to pay for all of it on your credit card, but you will likely find more dealers willing to accept a card for a down payment, or for a payment that covers a portion of the car.
If you can afford to pay the balance off immediately, buying a car with a credit card can be a great way to rack up rewards, but just because you can doesn’t mean you should.
There’s also the option to use a credit card with an introductory 0% APR to make a down payment or pay for a portion of the car. But you could rack up a lot in interest if you don’t have a solid plan to pay off the balance during the promotional period, or if your financial situation changes.
Most people opt for financing through either a car dealership, a bank, or a credit union, because auto loan interest rates are generally much cheaper than credit card interest rates. Some dealerships have 0% financing offers available on new models or cars that aren’t selling well. Saunders recommends finding a local credit union to finance your car.
“Credit unions typically offer much more competitive auto loan rates than traditional banks and dealerships,” Saunders says.
What to Consider When Buying a Car With a Credit Card
Before you swipe or tap your credit card for your next car, take these things into consideration to avoid costly mistakes.
Cost of Interest Payments
It’s important to consider the cost of interest payments and fees when purchasing a car with a credit card, which tends to have a higher interest rate compared to a bank loan.
“If the plan is to pay the car off over time, you might save lots of money in interest by going with a traditional bank loan,” Saunders says.
The Size of Your Credit Limit
The credit limit on your card is usually dependent on your income and credit scores, as well as other loans and credit card balances. If you want to put an entire car purchase on your card, make sure your credit limit is high enough to cover it. It may be more realistic to put a down payment on the card, or pay for only a portion of the total.
Working With Car Dealers’ Policies
Every car dealership operates a little differently from one another. Some will accept credit cards, some won’t. Those that do charge you more — up to 3% — to cover card processing fees. Keep this in mind when you’re working out the purchase price.
One strategy is to negotiate the price first, Julien says. Be sure to do some research online beforehand through Edmunds.com or KelleyBlueBook.com to find out what the car is worth. It will come in handy at the negotiating table.
“Once the dealership has agreed to that, then you can determine forms of payment. Dealerships want to be able to sell you a car and a car loan. If you lead with your payment preference, then they may be less flexible on negotiating the price of the vehicle,” Saunders says.
Wells wasn’t aware of any extra fees and didn’t negotiate the price of her car. She felt her dealership made it almost too easy for her to buy a car with a credit card.
“I had zero funds and no alternatives, so even if they were charging me a fee for using a credit card, I didn’t feel like I had a choice. I knew it was a bad idea. That’s what happens when you’re in a bind. You end up having to pay more,” she says.
How Much Will It Cost You?
Like Wells, some prefer to use their credit card only for a down payment and take out a car loan to cover the rest, while others might put the entire purchase on their card. Figure out what you prefer and find a dealer who is willing to work with you.
Unless you plan to pay down the purchase on your card immediately, you’ll need to calculate how much interest you’ll pay on top of the total price of the car. You can use the Edmunds car loan calculator online to get a clearer picture of your monthly payment estimate on a used car loan or a new car loan. Do some math to figure out exactly how much it would cost if you put the purchase on your credit card versus taking out an auto loan. Compare the two — auto loan vs. credit card — and see which one is more affordable.
If you only have a high-interest credit card, and you can’t pay the balance in full right away, Wells says it’s in your best interest to go with an auto loan. Bear in mind that lower rates tend to go to borrowers with higher credit scores.
Your Credit Will Likely Take a Hit
Buying a car is a huge purchase so if you’re using a credit card, it could affect your score.
Credit bureaus look at a wide range of factors when determining credit scores to include the total amount of debt you have compared to the amount of credit you have available to you. This ratio is called credit utilization, and makes up 30% of your total credit score.
Carrying a large balance, like the price of a car, doesn’t help your ratio. In general, the lower your debt utilization, the better impact it has on your score. That’s another reason it’s important to have the funds to pay your card immediately after you make the charge.