I've already made every imaginable mistake so that you don't have to.

Buying A Car With A Credit Card?

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This page is my take on using a credit card for buying a car.
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.

I Was Told There Would Be No Math!

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.
In a test in an undergraduate environment you may be expressly told not to introduce any information from outside the course.
In contrast, in real life it is your responsibility to seek out relevant sources.

Fees For Dealership

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.
The fee will be split between the payment network of the credit card and the issuer of the charge or credit card.
Historically, American Express charged a higher fee than other Discover, Mastercard, and Visa.
That may no longer be the case, but because of that history even in the United States, American Express acceptance is not quite as good as Mastercard and Visa.
Outside the United States it is an even bigger issue.

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 car is small.
The total profit on the car may be greater than the entire price of the cashmere scarf, but as a percentage of the sales price, the profit is greater on the cashmere scarf.
The profit margin as percentage of a cashmere scarf is so great that giving up 3% to the credit card industry is something a luxury goods retailer will gladly accept any day of the week.
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 percent of the profit.

Exercise: Buying A Car With A Credit Card

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?
Let's divide and conquer:

Mental Math

  1. The math for $10,000 is relatively easy, so let's divide $20,0000 by 2 so we can work with $10,000.
  2. What is 3% of $10,000?
  3. If you need to think about that answer, what would 3% of $100 be?
  4. 3% of $100 is $3.
  5. $100 only has 2 zeros.
  6. We need 4 zeros for $10,000, so multiply our $3 from step 4 by 100 for $300.
  7. 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 mutliply $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 too confuse you.

Grossing Up

Should you receive a bonus of $1,000 at your job, you will probably not be surprised to find that the amount of the payment to you is less $1,000.
However, some people new to the job market might be surprised.
Human resources or their line manager will explain that of course tax were withheld.
However, if a senior executive were promised a given cash bonus, the employer might agree to "gross up" the payment such that the executive's after tax payment is equal to the promised bonus.
Income taxes are generally greater than 3%, but the concept remains the same for the math to follow.
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.

  1. Divide each side by .97
    ( $X times .97 ) / .97 = $20,000 / .97
  2. $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.

Opportunity Cost

It gets worse.
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 credit card that has $25,000 credit limit and 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.

Using A Credit Card For a Deposit

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.

My Takeaway

For the reasons below, for most people, buying a car with a credit card would NOT make sense.

  1. High revolving credit utilization for consumer if financed on a personal credit card
  2. Either high initial interest rate, or high rate after promotional period.
  3. Opportunity cost from dealer loan.