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Buying A Car With A Credit Card?
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Car Shopping > Credit Card >
This page is my take on whether or not it makes sense to use a credit card to buy a car in the United States. For those of you outside the United States, I have no idea as to how any of this information may or may not apply to you. If you do live in the United States, if after reading through this entire page you still have an opinion on this that is different from mine, it is unlikely that either of us will be persuaded by the other person's opinion regarding this particular topic.
Who told you that? I never told you that. Depending on your background, the math presented later in this page might be anywhere from trivially easy to not particularly easy. Even if you do find the math in textbooks to be easy, it is still important that you be able to take the abstract knowledge that you learned in school and apply it to your financial transactions. Sometimes in a test in an academic environment you may be expressly told not to introduce any information from outside the course. In contrast, in real life it is absolutely your responsibility to seek out helpful references BEFORE you sign your name to a contract.
A given provider of goods or services may or may not accept credit cards. If that provider of goods or services does accept credit cards, that business will be paid the total transaction minus a 3% fee. Absolute Versus Percentage
Compared to many of the things that we buy, in absolute terms cars are expensive. Even most cashmere scarves will cost far less than an inexpensive roadworthy car. Compared to many of the things that we buy, as a percentage of the sales price the profit margin on a new car may be small. The total profit on a car may be greater than the entire price of a cashmere scarf, but as a percentage of the sales price, the profit is greater on the cashmere scarf. If I were selling cashmere scarves, I would gladly give up 3% to the credit card industry in order to make a sale. In contrast, by accepting a credit card for the full price of the car, the car dealership would be giving up a very large percent of the profit.
Assume that you purchase a vehicle for $20,000 and that the fee charged to the dealership would be the 3% stated in earlier in this section. If you were able to put a charge for $20,000 on your credit card, how much would the dealership receive from its credit card processing company? Would it or would it not make sense to purchase a vehicle with a credit card? Why or why not?
The cost for a merchant to submit credit card purchases is about 3%. For this particular question, we will assume it is exactly 3%. That means that for this question, the auto dealership would get paid 100% minus 3% equaling 97%. 97% of $20,000 is what the dealership would get paid. You could reach for a calculator, and if there is any absolutely any doubt as to the correct answer, that is what you should do. For these particular numbers manyevery one of us can answer this in our heads. Did I set the question up that way on purpose? Perhaps. Let's divide and conquer:
The math for $10,000 is relatively easy, so let's divide $20,0000 by 2 so we can work with $10,000.
What is 3% of $10,000?
If you need to think about that answer, what would 3% of $100 be?
3% of $100 is $3.
$100 only has 2 zeros.
We need 4 zeros for $10,000, so multiply our $3 from step 4 by 100 for $300.
Now we need to multiply by 2 to get from $10,000 back to the $20,000 in the exercise. $20,000 minus ( 2 times $300 ) means $20,000 minus $600 for $19,400. We could have calculated $10,000 minus $300 for $9,700 then multiply $9,700 by 2 for the same answer of $19,400, but most of us will find it easier to subtract 2 times $300 from the total.
If your day job involves finance, you can likely compute the steps above far more quickly than I can explain the process, just as with tying your shoes. If there is any chance that you will ever sit through a timeshare sales presentation, numbers will be thrown at you like in the steps above, except that the intent will be to confuse you. In my original dradt of this section of the web page I only had the steps 1 through 7 above regarding how to do this in your head. Most devices that have a web browser will also have a calculator. You could get to the answer quickly with a calculator by calculating $20,000 times .03 = $600 to calcuclate the fee that the dealership would pay. Then you could calculate the final answer with $20,000 - $600 for a net of $19,400 paid to the dealer. To leverage having the calculator available while saving a step, you could have jumped directly to $20,000 * .94 = $19,400.
If the dealership wanted to receive the agreed up on price of $20,000 from a credit card, how much would the dealership need to bill the credit card? Most of us can calculate an estimate in our head, but speaking for myself, I cannot calculate the exact value in my head. $X times .97 = $20,000, solve for $X.
Divide each side by .97 ( $X times .97 ) / .97 = $20,000 / .97
$20,000 / .97 = $20,618.56
The dealership would need to charge your credit card $20,618.56 if the dealership expected to receive $20,000.
Zero percent promotions are nice, but credit card companies do not offer them as an act of charity. Once the zero percent interest rate expires, going forward the non-promotional rate will be much higher. Quite possibly 20% or more instead of the single digits that might be charged for a new car loan.
I very strongly encourage you to speak your bank or credit union regarding a potential car loan before you speak to a car salesperson. The financing that an auto dealership arranges may or may not meet or beat what you can find on your own. If the customer had financed the car through the dealership, the company lending the money might have paid the dealership a fee.
Let's assume the customer has a personal credit card that has a $25,000 credit limit and a 15 months no interest offer for purchases. If the total of your revolving credit limits is $25,000, then spending $20,618.56 would mean your credit utilization would be 82%. $20,618.56 / $25,000 = 82% 82% utilization on your revolving credit will lower your credit score significantly.
If you have read through this page from start to finish, you will likely gather that I am not in favor of using a credit card to purchase an automobile. Making a deposit on a vehicle is less of an issue. Let's say you visit the dealership. You decide it will make the most sense to get a loan from your bank or credit union. You put a deposit on a vehicle for $500. Using the same 3% we used above for the credit card fee, how much would the credit card processing company subtract from what they pay the dealership? 3 per cent means three per hundred. $500 is $100 times 5. The fee to the dealership would be $3 time 5 equaling $15. $15 relative to a $20,000 transaction for a consumer purchase is negligible.
For the reasons below, for most people, paying for a new car entirely with a credit card would NOT make sense.
High revolving credit utilization for consumer if financed on a personal credit card
Either high initial interest rate, or high rate after promotional period.
Opportunity cost from dealer loan. If a car dealership arranges the a customer's financing through a bank or credit union, the bank or credit union may pay the dealership a fee. If instead the dealership allows the customer to pay for a vehicle with a credit card, the dealership has to pay a fee.
