Should You Use a Credit Card to Make a Car Down Payment?

car down payment on credit card

Credit card enthusiasts will do just about anything to earn rewards points –even putting a car down payment on a credit card. While it might sound crazy, doing it right can be a great way to rack up rewards for free. Do it wrong, though, and you’ll pay big time.

Earning credit card rewards with a car down payment

In February 2016, my wife and I were in the market for a new car. After visiting two dealerships, we found a car that suited our needs and drew up paperwork with a finance manager.

When asked how much we planned to put down, we told the manager $3,000. Then, I asked how much of that we could put on a credit card. We had the cash available, but I wanted to see if we could get any rewards out of the deal. He told us that we could put the full $3,000 on our credit card with no fee.

To cover the down payment, I used the Citi Double Cash Card. It offers one percent cash back when you make a purchase then another one percent when you pay it off. I paid off the card a few days later.

As we walked out of the dealership, we not only had a new car but earned $60 in cash back.

The pitfalls of using a credit card for a car down payment

Tyler Philbrook, from Clearwater, Fla., had a different experience. The 27-year-old pharmacy tech made a $1,000 credit card down payment on a car when he was 21. “I had that amount in cash,” he said, “but I had just got a brand new card that I thought getting points would be amazing.”

But before he paid off the card, what he describes as “young foolishness” took over. He ultimately used the cash for other things, such as eating out and going out with his friends and then-girlfriend.

His credit card debt ballooned with the card’s 23% APR. “Not knowing any better,” said Philbrook, “I kept adding to the card till it was maxed out.”

It took a year to pay off the $1,000 purchase alone. Six years later, Philbrook is finally paying off the last of his credit card debt. Looking back, he wishes he would have either paid for his car in cash or paid off the card as soon as the charge went through.

When it’s OK to put a car down payment on a credit card

Making a car down payment with a credit card is a great way to rack up rewards. But before you whip out your credit card at the dealership, you’ll want to ensure the following.

1. You have the cash on hand to pay off your debt

Putting a car down payment on a credit card doesn’t make sense unless you have the cash to pay off the debt immediately. Even if your credit card has a 0% APR promotion, you don’t want to risk carrying the debt after the promotional period ends.

If you do have the cash to pay off the purchase, don’t hesitate to pay it off as soon as possible. The value of the rewards you earn can be wiped out by interest costs.

2. The dealership accepts credit cards

Not all dealerships allow you to make a down payment with a credit card. This is generally because of the merchant fees they have to pay for the transaction. If you’re set on getting rewards, consider calling the dealership to verify their policy.

Of course, if you’re getting a good deal on a car but the dealership won’t allow you to pay with a credit card, you might be better off missing out on the rewards.

3. The dealership doesn’t charge a fee

Because dealerships pay a merchant fee when you use a credit card, they sometimes charge a fee of their own to pass the cost onto you. If that fee is higher than the rewards rate on your credit card, pay with cash instead.

Don’t let credit card rewards cloud your judgment

The next time you buy a car, consider using a credit card to earn rewards on the down payment. If you don’t have the cash on hand to pay off the card, or you simply can’t put the down payment on your card, stick with cash.

Whether you’re putting a car down payment on a credit card, consider the rewards a bonus rather than a goal. Spending money that you don’t have or paying extra to get rewards defeats the purpose.

In fact, if you’re not careful you might end up losing money by trying to earn rewards. So, be sure to pay off your card in full as soon as possible. Not only will you avoid interest charges, but having too high a balance when your statement closes can hurt your credit.

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