5 key factors to keep in mind when paying for a car with a credit card

Purchasing a car is a major financial commitment, and the idea of using a credit card for the payment may seem appealing, particularly if you're aiming to earn rewards. While this method can offer benefits, it’s essential to weigh the pros and cons carefully. This blog will guide you through the important factors to consider before opting to pay for a car with a credit card.

Can you actually buy a car 100% on a credit card?

The idea of purchasing an entire car with a credit card may sound appealing, especially if you want to rack up reward points. However, in reality, it’s not that simple.

Booking amount via credit card: Almost all car dealerships accept credit cards for paying the booking amount, which typically ranges from 5-10% of the car's value. For example, if you're buying a car worth ₹10 lakh, the booking amount could be around ₹50,000 to ₹1 lakh. In fact, dealerships like VW and Skoda often allow transactions up to ₹1 lakh on a credit or debit card without any issue. In some cases, especially for premium vehicles, this amount could go as high as ₹3-5 lakh.

Remaining payment: Credit cards aren’t always accepted. However, when it comes to paying the remaining balance of the car's price, most dealerships won’t accept full payment via credit card. This is because the dealership has to pay a transaction fee of around 1.75% on the amount charged, which cuts into their margin. For American Express cards, the fee can go as high as 2.5% along with taxes. This is a significant loss for car dealerships, making them hesitant to accept credit card payments beyond the booking amount.

What are your options?

If you're set on paying with your credit card, there are a few options to explore:

• Stretch the booking amount: Try negotiating with the dealer to allow a larger portion of the payment to be charged to your card, especially for the booking amount.
• Bargain on transaction fees: Some dealerships might be open to splitting the transaction fee with you, or even absorbing it, particularly if you’re using a high-end credit card with substantial benefits.
• Absorb the transaction fee: If you have a super-premium card with attractive rewards (such as a high-end Visa Infinite or American Express card), the rewards earned may offset the transaction fees. But, this is only worth considering if you have a high credit limit, as large transactions can significantly affect your credit utilisation ratio.

What things to consider before buying a car through credit card?

• Merchant fees: Before making a purchase, it’s crucial to inquire whether the car dealership will charge an additional fee for credit card payments. Many dealerships levy a surcharge to cover their processing costs, which can range from 1-2%.
• Reward points and benefits: One of the key advantages of using a credit card for large purchases like a car is the opportunity to earn significant reward points. However, it's important to understand your credit card’s rewards structure and calculate the potential benefits.
• Credit limit and utilisation: Before swiping your card, ensure your credit limit is high enough to cover the car's cost. Large transactions can push your credit utilisation ratio up, potentially affecting your credit score. If you anticipate a high utilisation ratio, consider requesting a credit limit increase or spreading the payments across multiple months to minimise the impact on your credit score.
• Interest rates and repayment terms: Credit cards generally come with high-interest rates, which can be much steeper than personal loans or car loans. If you cannot pay off the balance in full before the due date, the interest charges can quickly add up. Make sure you're prepared for the monthly repayments, and carefully consider the total cost of the car after accounting for interest. If you plan on paying off the balance over time, assess whether the benefits, such as reward points, justify the extra cost in interest.
• Merchant category codes: MCCs can sometimes influence the rate at which you earn reward points. Some cards offer bonus rewards for specific spending categories, like dining or travel. Additionally, certain credit cards offer better reward points or benefits for specific categories, so knowing the MCC can help you maximise your rewards. If a merchant's MCC doesn't align with a bonus category, you might earn fewer points than expected, and the entire benefit of using a credit card will be diminished.

Conclusion

Using a credit card to purchase a car can be a great way to earn rewards, but it’s essential to consider all factors before deciding. Evaluate the merchant fees, your credit limit, interest rates, and your ability to repay the balance on time. Compare alternative financing options to ensure you are making the most cost-effective choice. By considering these aspects carefully, you can take full advantage of your credit card’s benefits while avoiding unnecessary financial stress.

Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited