Is it a good idea to buy a car on a credit card to earn reward points?

Reward points are like golden tickets offered by credit card companies to entice users. The more you spend, the more points you accumulate, which can be redeemed for a variety of perks like travel, shopping, dining and more. The prospect of earning these reward points often tempts many to pass their big-ticket purchases like cars on credit cards. But is that a wise decision? Let’s delve deeper to know more.

First and foremost, buying a car on your credit card is technically possible, provided your card’s credit limit accommodates such a purchase, and the dealer agrees to the transaction. The prospect of earning mega points or hitting a big spending bonus is what primarily fuels this idea. And yes, these rewards can indeed be lucrative sometimes. But dipping into credit to such an extent for a reward must be diligently thought through.

It’s crucial to note that hefty interest rates on credit cards could potentially outweigh the rewards you get. If you cannot pay off the balance on the due date, the interest you accrue can significantly exceed the value of your reward points. Hence, it’s recommended to pursue this route only if you can pay off the balance in full to evade any interest. 

“Buying a car on a credit card can be a good option for consumers who have a high amount in liquid cash, which they do not wish to invest anywhere. They can use the card to make the purchase and pay off the amount in full when the due date comes,” said Rohit Chhibbar, Head of Credit Cards Business, Paisabazaar. However, car dealers may be reluctant to accept the full payment via credit cards due to the high Merchant Discount Rate (MDR) charges that they would have to pay.  MDR charges generally range between 2-3% of the transaction amount. In case dealers do accept credit cards, they may impose additional charges to recover the cost of MDR charges, said Chhibbar. MDR is a fee charged to a business by the company that processes its debit and credit card transactions.

The fine print should also be meticulously read before making such heftier transactions. Some credit cards cap the number of points you can earn on a single purchase, and some reward programs have terms on how you can use your points. The card might also have policies limiting the amount that can be charged at once. Additionally, some dealers may charge a fee for credit card purchases or may not accept them altogether for high-value items. 

“Since buying a car would be a high-ticket purchase, you will need a high credit limit on your credit card. Even if the available limit on your card is sufficient to fund a car purchase, the entire amount will be included in your next statement and you would have to clear the bill by the due date. Failure to do so will result in high finance charges, which can go up to 42% p.a. and might push you into debt. Though you will earn reward points or cashback, however, if you cannot repay the amount on time, the additional charges will outweigh the benefits by a wide margin,” said Chhibbar.

If you choose to buy a car and convert the transaction into EMI, the interest charges would be higher than that on a car loan. Hence, using your credit card to buy a car would be practical only if you can afford to clear the dues on time and the value-back outweighs the cost. Moreover, it might affect your credit score as you will utilise the credit limit to the maximum. 

In conclusion, while tempting, buying a car on your credit card simply to earn reward points may not be the smartest move unless you possess a clear plan to circumvent the associated risks. It is always recommended to thoroughly understand the reward system, read through the fine prints, and discuss your options with your card issuer before making such a significant decision.

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