4 min read

can you buy a car with a credit card

Written By

Clay Shiffman

Buying a car with a credit card may seem attractive, offering the convenience of buying now and paying later and potential credit card rewards. However, the reality is more complex when you purchase a car with credit. From dealership policies to credit card limits and debt accumulation, it's essential to consider how this purchase affects your financial profile before swiping your card on a big-ticket item.

This comprehensive guide explores the feasibility, advantages, and disadvantages of purchasing your new set of wheels with a credit card. We also examine the difference between using your credit card or a car loan and other options to help you make an informed choice for your situation.

What is a credit card?

A credit card is a financial tool that allows individuals to borrow from a financial institution, up to a predetermined credit limit. The buy now, pay later model provides cardholders with flexibility in managing expenses, convenience in transactions, and the potential to earn rewards and build credit history. Cardholders can use their credit card anywhere retailers accept credit card payments, and are responsible for paying their credit card debt in full by the due date to avoid interest charges.

Can you purchase a car with a credit card?

In many cases, it's possible to purchase a car with a credit card. You can borrow up to your credit limit to fund all or a portion of your car payment. Like any purchase you make with a credit card, you're required to pay off the amount you borrow by the due date in your credit card statement. Using a credit card for your car purchase may result in high interest charges if you don't pay off the balance quickly. It's important to evaluate the pros and cons of your choice to determine whether it's a practical and cost-effective option for you.

Can I use my credit card to make a down payment on a car?

Using a credit card to make a down payment on a car is typically allowed, subject to the policies of the car dealership and the limitations of your credit card. Some car dealerships accept credit payments for your car down payment, but you can only spend as much as your credit limit allows. Car dealerships may also restrict the maximum amount you can put on credit due to transaction fees and the risk associated with large purchases.

Credit card companies may also restrict the size of the down payment you can make on your credit card payment. Credit cards have high interest rates, so it's important to consider whether it's financially wise to make such a big purchase using your credit card. If you can't pay off the balance quickly, interest charges can accumulate, making it harder to get rid of your debt. Be sure to check with the dealership and your credit card issuer about their credit and repayment policies and carefully evaluate your financial situation.

Can you pay off your car loan with a credit card?

In most cases, dealerships and lenders don't accept credit cards directly for car loan payments. Lenders generally require payments through bank transfers, checks, or automated withdrawals from a bank account.

However, there are indirect methods to pay off your auto loan with credit card payments. Some financial institutions offer balance transfer checks or cash advances on credit cards, which you may use to pay off auto loans. These methods often come with high fees and interest rates.

Some third-party services may allow you to use a credit card to repay your auto loan, but they usually charge processing fees. Carefully review the terms and fees associated with using a credit card to pay off an auto loan and consider whether it makes sense in your situation.

Will you get credit card rewards for buying a car?

Most credit cards offer rewards for swiping your card, such as cash back rewards and points. Whether you can earn rewards for your car purchase depends on the dealership's policy and your credit card issuer's terms. If the dealership allows you to buy a car with a credit card, you may earn rewards based on your card's rewards program.

A car is an expensive purchase, so buying a car with your credit card can potentially rack up a lot of points for your account. However, it's essential to note that many dealerships limit the amount you can charge to a credit card and may not allow you to pay the entire purchase price with a credit card. If you finance the car, you typically can't make monthly payments with your credit card, which means you won't earn credit card rewards for your loan or lease payments.

Buy a car with a credit card vs. a car loan

Deciding between buying a car with a credit card or a car loan involves weighing several factors, each with its advantages and disadvantages. Using a credit card offers flexibility in payment methods, and you may earn rewards like cash back, points, or travel miles. However, your credit limit may not cover the entire cost of the car, and dealerships may have limits on credit card transactions.

Furthermore, carrying a large credit card balance may not be the best idea. Credit card interest rates tend to be higher than those of auto loans. If you can't pay off your balance, you may end up paying significant interest charges, outweighing any rewards earned. If you have existing debt, adding a car payment can cause significant financial stress, potentially leading to a debt cycle.

If you have a high credit score and can get an auto loan, it can make purchasing a car more accessible and manageable. Auto loans have flexible repayment terms, including the loan duration and down payment terms. You can spread the cost of a car purchase over a period, typically several years.

You have a negotiation room with the dealership for a car loan. Depending on your situation and the dealership's policies, you can potentially negotiate smaller monthly payments and a longer payment schedule. It gives you more flexibility to manage your budget instead of worrying about paying off your credit card balance by the due date.

Many car loans offer fixed interest rates, meaning your rate stays the same throughout the loan's life. It provides predictability and stability in your monthly payments, making budgeting easier and allowing you to plan for the future more accurately. You can typically qualify for a higher limit on a car loan than a credit card, and a bigger budget gives you more car options to choose from.

Both a credit card and a car loan help you establish a credit history. If you already have a credit card, adding a car loan can diversify your credit mix. Successfully paying your car loan shows responsible borrowing behaviour, increasing your credit score and helping you negotiate credit card interest rates and car loan terms.

Is it a good idea to buy a car with a credit card

Buying a car with a credit card can be convenient in certain situations, but the decision to use a credit card ultimately depends on the dealership's policies and whether you're comfortable doing so.

Most credit card limits don't cover the full cost of the car. You can easily max out your credit limit, which means your credit card will be declined for further transactions until you pay off the balance. If you rely on your credit card for everyday purchases and bills, you may not have the available credit anymore.

Credit card interest is calculated by taking the interest rate, outstanding balance, and the period. While you may earn rewards for purchasing your car on credit, transaction fees, and potential interest charges for carrying a balance can quickly outweigh the benefits if you're struggling with debt management.

Late or missed payments and a high credit utilization ratio are two of the main factors harming credit scores. A low credit score makes it more challenging to qualify for future loans. If you have an expensive purchase planned, you may not have the credit score to apply for the loan you want.

Some credit cards offer a 0% annual percentage rate (APR) with promotion periods of over a year. If you're approved for one of those cards, it could provide over a year of interest-free financing. It's essential to weigh the pros and cons of using a credit card carefully and consider other options before making a decision.

Your credit limit and credit utilization

Your credit limit determines how much money you're allowed to borrow from the credit card company. If you're considering buying a car with a credit card, consider how your credit limit impacts your budget and available funds.

For example, if your credit limit is $10,000 but the car you want costs $45,000 and you only have $25,000 saved, you're missing $10,000 to cover the remaining balance. This is also assuming you haven't spent any of your available credit on other purchases.

Be mindful of your credit limit and credit utilization ratio when purchasing a car with your credit card. While it may seem easy to swipe your card for a new set of wheels right now, it may have future consequences that impact your debt management and financial health.

Will using a credit card to buy a car affect my credit scores?

Using a credit card to buy a car can potentially affect your credit score positively or negatively, depending on how you manage the transaction and your overall credit usage.

Credit utilization

One factor that affects credit scores is credit utilization, which is the ratio of your credit card balances to your credit limits. If using your credit card for a car purchase significantly increases your credit balance relative to your limit, it increases your credit utilization ratio, potentially lowering your credit score. High credit utilization suggests to lenders you may be overextended financially, which can harm your creditworthiness.

Payment history

Another crucial factor in credit scoring is payment history, which reflects your track record of making payments on time. If you use your credit card for a car purchase and make timely payments to pay off the balance, it can have a positive impact on your credit score. Conversely, if you miss payments or carry a balance and incur interest charges, it can hurt your credit score.

Credit inquiries

When you apply for a credit card to buy a car, the lender may perform a hard inquiry on your credit report. While the effects are only temporary, too many hard inquiries within a short period can indicate to lenders that you're actively seeking credit.

Credit mix

Credit mix refers to the variety of credit accounts you have. Using a credit card for a car purchase can diversify your credit, which can have a positive impact on your credit score. If you already have a lot of credit cards, consider getting an auto loan to diversify your credit portfolio. Lenders like to see a mix of credit types because it demonstrates your ability to manage different credit responsibly.

How do I increase my credit card limit?

You can contact your credit card provider and request a credit limit increase. Lenders consider your credit score, income, and overall financial profile when deciding whether to accept your request. A higher credit score indicates that you're a responsible borrower and may improve your chances of getting a limit increase. By being mindful of your payment history, credit mix, credit utilization, and credit inquiries, you can increase your score over time.

You may submit a credit limit increase over the phone, by logging into your online account or going into a physical location. Be prepared to provide information about your income, employment status, and changes in your financial situation that may warrant a limit increase. Some credit card issuers may periodically review your account for limit increases.

Alternatives to using a credit card to buy a car

If you're strapped for cash and using a credit card isn't the right option, here are some alternatives to consider:

  • Car financing: You typically pay a lower interest rate on an auto loan than a credit card. Speak with the dealership or a financial institution, like a bank or credit union, to estimate your loan terms, such as monthly payments and interest rates.

  • Find a co-signer: Applying for a car with a co-signer with good credit may improve your chances of qualifying and getting a lower rate for a loan.

  • Buy upfront in full: It's tough to save enough money to buy a car upfront with cash. But budgeting ahead and buying a less expensive car you can afford may be a better choice than jeopardizing your financial health with credit card debt. Many savings accounts let you earn interest to help you gather the cash faster.

  • Do a trade-in: If you already own a car, you may be able to trade it in and use the value for a down payment on a new car.

Need credit for your new car purchase?

Buying a car is a big financial decision. From the upfront cost to the regular maintenance and fuel expenses, it's a big chunk of your wallet. If you're shopping for a new car and need help financing your purchase, we can help.

Whether it's building a strong credit profile to increase your chances of securing a loan or applying for the loan itself, KOHO offers a variety of tools and resources. The virtual credit card and overdraft protection coverage are great credit-friendly tools to help you improve your credit profile as long as you use your credit card responsibly and pay off cash advances on time.

Monitor your credit profile with a free credit score report to ensure you're on the right track towards your ideal credit score. Your credit report provides valuable insights into how your score changed, the factors harming your score, and how you can fix them.

Learn more about how you can use KOHO to get your dream car.

Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up to date account information!