Will the dealer take a credit card?
Many will, up to a limit. J.D. Power says many dealerships have a dollar limit on credit card payments, with most capping card charges at between $5,000 and $10,000. That's often enough for a down payment, but not a whole car. Merchants pay a fee on card sales, and J.D. Power notes some dealers add a 2% to 3% surcharge to card purchases. Call ahead and ask both questions: how much can I charge, and is there a fee?
The real cost: interest
A credit card can be a cheap short-term tool if you pay it off in full. The CFPB explains that most cards have a grace period on purchases: you may not be charged interest as long as you pay the balance in full by the due date. Miss that, and interest is charged on the unpaid balance.
Card rates are usually much higher than auto loan rates. For example, if you charged $5,000 at a 22% APR and paid it off over 12 months, the payment would be $467.97 a month and you'd pay $615.66 in interest. The same amount on a car loan at a lower rate would cost far less. See your own numbers in the credit card payoff calculator.
Don't use a cash advance to pay for a car. The CFPB notes that grace periods typically apply only to purchases, and for cash advances you generally start paying interest on the day of the transaction.
0% intro APR vs "no interest if paid in full"
If you're thinking of using a card with a promotional rate, read the offer carefully. The CFPB explains the difference:
- A 0% introductory APR charges no interest during the promotion. If a balance remains at the end, interest applies to what's left from that date on.
- Deferred interest ("no interest if paid in full in 12 months") is different. Interest builds up in the background, and if you don't pay the whole promotional balance in time, interest going back to the purchase date is added.
Rewards: worth it only if the math works
Rewards are the main reason people try this. Do the math with your own card's terms: if the dealer charges a 3% surcharge and your card earns less than 3% back, you lose money before any interest. As an illustration, a $5,000 charge with a 3% fee costs $150. At a hypothetical 1.5% back, you'd earn $75, a net loss of $75. Meeting a sign-up bonus can change the picture, but only if you pay the card off in full.
The effect on your credit
A large charge raises how much of your available credit you're using. The CFPB says experts advise keeping your use of credit at no more than 30% of your total credit limit. A big car charge can push you well past that until it's paid down, which may lower your score just when you might want to apply for other credit.
When it can make sense
- You're putting a down payment on a card the dealer accepts with no surcharge, and you'll pay it off by the due date.
- A sign-up bonus or rewards rate is worth more than any fee, and you have the cash to pay the bill in full.
- You have a true 0% intro APR (not deferred interest) and a realistic plan to clear the balance before it ends.
When to avoid it
- You can't pay the full balance quickly. A car loan will almost always be cheaper than carrying card debt.
- The dealer's surcharge is more than your rewards.
- You're about to apply for a car loan or mortgage and need your utilization low.
Comparing financing instead? Use the auto loan calculator, or check whether a 0% dealer offer beats a rebate with the 0% APR vs rebate calculator.