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While demand for alternative forms of transportation is surging, most Americans will still spend far more money on their cars than they will on public transit and bicycle commuting. Likewise, credit cards still remain a dominant form of payment, even as more people use debit cards. So when faced with a major automotive expense, when is the right time to use your credit card?
Financing Emergency Repairs
For many, the key feature that credit cards offer over debit cards is the ability to finance expenses. When people are dependent on their cars and they have to pay for a major repair, 60% of American's will look to their credit cards because they lack the savings to handle a $500 auto repair. As unsecured loans, credit cards will typically have a higher interest rate than other secured loans such as a mortgage or car loan. Using your credit card to finance auto repairs should be a last resort in most cases.
One exception would be when you have a card that offers interest free promotional financing. Many credit cards come with offers of 0% APR interest for a limited time on new purchases, balance transfers (typically with a 3% balance transfer fee), or both. In these cases, financing an emergency car repair can come with little or no cost, so long as the balance is paid off before the promotional financing expires. But once the interest free period ends, cardholders will only then have to start paying the standard interest rate on any remaining balance.
Charging a New Car to a Credit Card to Earn Rewards
While it would be unwise to try to finance the purchase of a new vehicle using a credit card, you can try to use your credit card to pay for all or part of the purchase in order to earn rewards. It's pointless to carry a balance on a rewards credit card. You need to avoid interest charges by paying your balance in full in order to earn rewards that are worth more than the cost of interest.
Unfortunately, this strategy is not as easy as it sounds. First, many car dealers will be reluctant to accept credit cards, as they will be incurring a 2-4% merchant fee. Worse, they may take this cost into account during negotiations, resulting in a higher price. Therefore, the best strategy is to avoid any mention of your intent to use a credit card until you have arrived at a price. At that point, the dealer may or may not accept your credit card, but you'll have nothing to lose by asking.
Credit Cards Affiliated with Auto Manufacturers
Another potential way to leverage the power of a credit card when making an automobile purchase is to use a credit card co-branded with a car manufacturer. Several brands such as General Motors, Lexus, and Mercedes-Benz offer credit cards that allow you to earn rewards that can be applied to the purchase or lease of a new car.
While this sounds great, there are several disadvantages to these types of cards. First, they lock you into purchasing from a single brand. After spending years earning points towards a new Lexus, you will be unable to apply those rewards to a car from a competing manufacturer. In addition, most automotive credit cards have a limit on the amount of rewards that can be applied to a purchase. For example, the Lexus Pursuits Visa limits the amount of points you can use towards just 10% of the purchase price of a new car, although the BuyPower Card from General Motors & Capital One® has no such limits. Finally, the rate of return on these cards tends to be lower than other competing cards, while the interest rates and fees tend to be higher.
By taking the time to understand the advantages and drawbacks of using your credit card for automotive costs, you can make the best choice for you and your car.
* Editorial Note: This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through the credit card issuer Affiliate Program.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.