When You Buy A Car With A Credit Card, This Is What Happens

Credit cards can be a great way to pay for things, and they can sometimes even come with impressive credit limits. However, the temptation to use that credit to make large purchases, like a car, can sometimes be too great to pass up. Rather than negotiating with the dealer on interest rates or payment plans — you can simply swipe your card and make your regular monthly credit card payments. But is purchasing a car with plastic a good idea? Just like avoiding the potential pitfalls of leasing a car, there can be a lot to know about using a credit card to buy a car.

Buying a car on credit has benefits and drawbacks, and it is important to educate yourself on the practicality of the decision before moving forward. For example, car dealerships don't always accept credit cards as a form of payment, and, if they do, they might only allow your down payment to be charged to a credit card rather than the entire cost of the car. Plus, they could even charge a transaction fee. Additionally, weighing the differences between interest rates before deciding which method to use can be important. According to data from the Federal Reserve, the average interest rate on a 72-month car loan in November 2024 was 7.67%, while the average interest rate on a credit card account was 22.8%. Despite this large disparity in interest rates, there is a lot more to know about the pros and cons of using a credit card.

Whether or not you buy a car with your credit card is a personal choice, although your decision may be limited by what your dealership allows. If you do swipe your card and walk away with a new car — and a huge credit card balance to match — you could also be walking away with some impressive rewards points, depending on your card. It's no secret that many cards offer great rewards programs as an incentive for using their line of credit, and those rewards programs are often what prompts people to choose specific cards (and even use them for large purchases to meet certain rewards thresholds). Whether your card offers cash back, magazine subscriptions, gift cards, or points toward travel and accommodations, you could be reaping the rewards for some time in addition to enjoying your new car.

Additionally, another potential benefit of buying a car with a credit card has to do with credit. If you already have good credit, you can probably get competitive interest rates on loans, such as a car loan. However, if you don't have credit or need to improve your credit, making timely credit card payments can be a great way to build your credit fast. If you are confident that you will be able to regularly make your credit card payments, you may want to consider using credit to pay for a car (or at least part of a car) as it could end up helping your credit score for future purchases.

Credit cards allow us to pay for things we wouldn't otherwise be able to afford, make payments on large purchases, and cover emergency purchases we weren't expecting. However, credit isn't free. It usually comes with hefty interest rates and, if can't make your minimum payments or pay on time, you can wind up paying a small fortune in penalties. To make matters worse, missed payments can prompt your credit provider to raise your interest rates further, potentially costing you much more than you would have paid had you financed through the car dealership. Additionally, large credit card balances, missed or late payments, and poor debt-to-income ratios can all negatively impact your credit score which can affect your ability to get credit in the future. This is not a great tradeoff considering how quickly cars depreciate after purchase.

When you finance a car through the dealership, you agree to a payment plan with set payments made over a certain amount of time. While these plans may come with high monthly payments, you have a designated time frame to make them. With a credit card, you are in control of how much you choose to pay every month, and how long it takes you to pay. If you don't pay an amount comparable to what you would have through the dealership's payment plan, you could end up taking much longer to pay off the car, thus accruing even more debt through interest and paying more for the car than you would have through traditional financing.