How to Pay a Car Payment With a Credit Card

Individuals sometimes consider using a credit card to make a car payment for various reasons. This approach can be appealing for those seeking to earn credit card rewards, manage their monthly cash flow, or address an unexpected financial need. Understanding the available methods and their associated financial consequences is important before proceeding.

Direct Payment to Lenders

Most car loan lenders generally do not accept direct credit card payments for monthly installments. This is primarily due to the processing fees, known as interchange fees, that credit card companies charge merchants for each transaction. These fees, typically ranging from 1.5% to 3.5% of the transaction amount, can be substantial for large payments like a car loan. Some lenders might permit partial payments or accept credit card payments only under specific circumstances, such as for a final payoff. Even in these limited scenarios, they may impose a convenience fee or surcharge to offset their processing costs. Borrowers should always consult their specific lender’s payment policies to understand what options, if any, are available for direct credit card payments.

Indirect Payment Options

When direct payment to the lender is not feasible, several indirect methods allow a credit card to facilitate a car payment. Each method involves distinct processes and associated costs.

Third-party payment processors

Third-party payment processors offer a way to pay bills that typically do not accept credit cards directly. Services like Plastiq allow users to submit a payment using a credit card, and the service then sends a check or electronic transfer to the payee, such as a car loan lender. These services generally impose a transaction fee, which typically ranges from 2.5% to 3% of the payment amount.

Balance transfer

A balance transfer involves moving debt from one credit card to another, often to consolidate debt or take advantage of a lower promotional interest rate. While a balance transfer does not directly pay a car loan, it can free up cash in a checking account. For instance, if an individual transfers an existing credit card balance to a new card with a 0% introductory APR, the money that would have been used for the original credit card payment becomes available. Balance transfers commonly incur a fee, typically between 3% and 5% of the transferred amount.

Cash advances

Cash advances allow individuals to withdraw cash from their credit card’s available credit limit. This cash can be obtained at an ATM, through a bank teller, or by using convenience checks issued by the credit card company. Cash advances typically carry immediate fees, often 3% to 5% of the advanced amount, with a minimum fee usually around $10.

Convenience checks

Convenience checks are a specific form of cash advance that function like personal checks, drawn against a credit card’s line of credit. These checks can be written out to oneself or directly to the car loan lender. Similar to other cash advances, convenience checks are subject to immediate fees and do not come with a grace period for interest accrual.

Financial Factors of Credit Card Use

Using a credit card for a car payment introduces several financial considerations that can significantly impact a borrower’s financial health.

Credit card Annual Percentage Rates (APRs)

Credit card Annual Percentage Rates (APRs) are generally much higher than the interest rates on car loans. While car loan APRs might range from 3% to 10% depending on creditworthiness and market conditions, credit card APRs typically fall between 15% and 30% for purchases. For cash advances, the APR is often even higher and begins accruing interest immediately from the transaction date, without the standard grace period usually offered for purchases. This means that borrowing money via a cash advance to pay a car loan can result in a substantially higher overall cost due to the accelerated and elevated interest accumulation.

Various fees

Various fees can accumulate when using a credit card for a car payment. Third-party payment processors charge transaction fees, usually 2.5% to 3% of the payment. Balance transfers incur fees, typically 3% to 5% of the transferred amount. Cash advances and convenience checks also come with fees, commonly 3% to 5% of the amount advanced, often with a minimum charge. If the credit card bill is not paid on time, additional late payment fees will be assessed, further increasing the financial burden.

Credit utilization ratio

The credit utilization ratio, which is the amount of credit used relative to the total available credit, is a significant factor in credit scoring models. A large car payment charged to a credit card can substantially increase this ratio. For example, if a $500 car payment is charged to a card with a $2,000 limit, the utilization instantly becomes 25%. A high credit utilization ratio, generally considered above 30%, can negatively affect a credit score, as it suggests a higher reliance on borrowed funds.

Overall impact on a credit score

The overall impact on a credit score is multifaceted. A high credit utilization ratio is a primary concern, as it can lower the score even if payments are made on time. Furthermore, if the credit card balance becomes too large to pay off quickly, carrying a high balance month-to-month can signal increased credit risk to lenders. Consistently making timely payments on both the car loan and the credit card is important for maintaining a positive credit history, but the increased debt load from using a credit card for a car payment can still pose risks to one’s credit standing.