Buying a Car With a Credit Card: Is It a Good Idea?

You can earn big rewards or make a down payment at a 0% intro APR -- but it might not be worth it.

Most people take out a personal loan to buy a car or pay for it with cash. But it's sometimes possible to buy a car with a credit card. This can result in massive interest charges, but if you pay off your balance quickly, it can also be a good way to earn rewards or take advantage of a 0% intro APR period.

That being said, it isn't always a wise choice. Here's what you need to know about buying a car with a credit card -- when it's a good idea and when it isn't.

Make sure your dealer accepts credit cards and check on fees

Merchants have to pay higher fees to process credit card transactions, so some car dealers don't accept credit cards. Even if they do, they might place a limit on how much you can pay with your credit card. For example, you might only be able to put up to $1,000 on your credit card.

If your car dealer does take credit, ask if they charge credit card processing fees. It might not be worth using a credit card if you end up paying a 2% or 3% fee on a transaction of several thousand dollars.

Avoid financing a car with your credit card

In most cases, you won't want to finance a car with your credit card. Credit cards have high interest rates, especially compared to personal loans and car loans.

For example, it's possible to get an auto loan with an interest rate of 3% or 4%, especially if you have good credit. Even the best low interest credit cards can come with an ongoing APR of 14% to 24%. You could end up spending thousands on interest payments, and if you fall behind, it could wreck your credit. It's usually better to see if you can qualify for a loan when it comes to big purchases like a car.

Buying a car with a credit card to earn rewards

Some people want to pay for a car or make their down payment using a rewards credit card so they can earn extra points and miles. This can be worth it, as long as the dealer doesn't charge credit card processing fees and you pay off your balance in full by the end of the month to avoid interest.

You can even use your car down payment to target a good credit card sign-up bonus. Some of these bonuses are worth close to $1,000, so this can be a very lucrative option.

If you want to go this route, you'll need to apply for the credit card in advance so you have it in hand when you go to shop for cars. Make sure to choose a rewards program that offers rewards you'll actually use. Travel credit cards with flexible points are a great option if you plan to take any trips in the near future. If not, you can opt for a cash back credit card.

Using a 0% intro APR credit card to buy a car

For a limited period of time after opening, 0% intro APR credit cards won't charge interest. This is usually anywhere from 12 months to 21 months. This can be a great opportunity to finance a portion of your car without paying any interest, but you have to be careful.

If you're unable to pay off your balance before the promotional period ends, you'll end up being charged the ongoing interest rate for any remaining balance. These credit cards tend to have very high ongoing APRs -- anywhere from 14% to 24% -- and those interest charges will add up fast.

For example, let's say you still have a $3,000 balance when the promotional period ends and the card charges a 17% ongoing APR. If you make $75 monthly payments, you'll spend $1,459 on interest, and it'll take you five years to pay off.

Consider how it will impact your credit score

Putting a large expense on your credit card will impact your credit score. One of the most important factors in determining your credit is your credit utilization ratio -- that is, the portion of your overall credit limit you're actually using.

The lower this number, the better. So if you buy a car with your credit card and your balance inches closer to your credit limit, you'll probably see a dip in your credit score.

That being said, your credit utilization is updated regularly, so the dip will be temporary as long as you pay down your balance. If you pay it off in full immediately, you should see your score go back up shortly thereafter.

Falling into credit card debt can be expensive, and it can hurt your credit. Whatever you choose to do when purchasing a new car, make sure you know how much it's going to cost you and how to do it without risking your credit.