The Drawbacks of Using a Credit Card to Buy a Car

The common ways to pay for a car when you visit the dealership include using cash, a certified check or a loan from a bank, but you may wonder about the possibilities of paying with a credit card. This method comes with a number of drawbacks that should convince you to consider all other options and possibilities available first.

The Process

The obvious method of paying for a car with a credit card is to swipe the card to pay for the transaction, just as you would for another type of sale. But if the dealership prefers a check, you may have to ask for a cash advance from the credit card company instead to pay for the car. Some creditors issue cash advance or balance transfer checks for this purpose. However, if you do a balance transfer you'll have to pay a fee to the credit card company on top of the price of the car, which is usually about 2 or 3 percent.

Higher Rates

Credit cards commonly come with higher interest rates than standard car loans. You could easily end up spending 10 to 20 percent or more on the balance you've borrowed on a credit card instead of the 6 to 7 percent average for auto loans, as of December 2010. Even if the rate on the credit card is low at first, it could change in the future, whereas most auto loan rates stay fixed for the entire term.

High Credit Utilization

When you make a large purchase on your credit card that takes up all or most of your available limit, that causes your credit utilization ratio to shoot up immediately. Credit utilization is the balance you've spent on the card divided by the available limit--generally, the higher this ratio the lower your credit score. So if your credit limit is $10,000 and you purchase a car for $5,000 on your card, your ratio jumps from 0 percent to 50 percent instantly.

Warnings

Not all dealerships will accept a credit card payment to pay for a car. If they do, they may only accept it for a portion of the purchase. When a dealership takes a credit card it must pay expensive transaction fees to its merchant services provider, so the salesman may try to pass that extra cost on to you. Also, note that if the credit card company sees a charge of thousands in one instance, it might flag the charge and investigate the transaction.