After reaping the benefits, the 31-year-old recently guided his brother to buy a car using credit cards and earned about 6% worth of rewards.
Most car dealers accept payments made with credit cards and even allow buyers to make the full payment with it. Sounds good. However, the process is a little more complicated. From the car dealer charging an extra 1-2% for credit card payments to a possible impact on your Cibil score, there are several things to consider before swiping the plastic. Also, the rewards may not always be in the form of cashback or air mile points so the user should not confuse the potential benefits through this payment method to a discount on the purchase price.
What to watch out for
In most cases, car dealers charge an extra 2% fee for credit card payments. For American Express cards, this fee could be higher, at 3-4%. By doing this, the dealers essentially pass on the MDR (merchant discount rate) to the customer. MDR is the fee merchants are charged by banks for accepting credit or debit card payments. This can not only eat into your net reward return but also increase the upfront cost you pay.
Sumanta Mandal, founder of Technofino, said there is scope to negotiate this fee. “It is entirely possible to negotiate the fee down to less than 1%. Going to a dealer with whom you have a past relationship helps in this regard. When I bought my car, I managed to get the entire fee waived. Buyers should enquire with 4-5 dealers to find out who is willing to give them the best rate,” he said.
If you have to pay the full fee, check if it is less than the reward rate you earn so that you don’t end up paying more in fees while chasing rewards.
The second challenge is to ensure that the purchase doesn’t impact your credit score. When a credit card holder uses more than 30-40% of his credit limit in a month, it can negatively impact the credit score as it indicates high dependency on credit. Since car purchase is a high-value transaction, the credit utilization ratio could go through the roof. The buyer has to smartly plan the purchase to avoid this.
Mumbai-based Bhushan Talekar was aware of this. When he decided to pay the entire ₹10.5 lakh cost of his new car with credit cards, he worked out a plan with the dealer: He would make the payments over 3-4 months before getting delivery of the car. Typically, a buyer pays ₹50,000-1 lakh as the booking amount and the remaining in one go right before the delivery of the car. “I used the waiting period on the car to my advantage. The dealer did not object as no buyer usually pays the full amount two months before the car delivery,” said Talekar.
That’s not all. In those months when the total amount paid by card exceeded 30% of his total credit limit, he cleared the due amount even before the credit card statement was generated. This ensured that the entire amount Talekar paid through the card did not get reported to credit bureaus.
Here is how you can do this. For instance, let’s consider that you make transactions worth ₹3 lakh with your credit cards in a month. Assuming that your card statement is generated on the 25th of every month, if you clear ₹2 lakh of the total amount spent before 25th, only ₹1 lakh will reflect in your card statement and be reported to credit bureaus. Statement generation date is different from the due date for payment of the credit card bills.
When is it beneficial?
Funding a car purchase with credit cards is an attractive option because of the potential rewards it offers on the high ticket purchase. “Even a modest 2% reward return rate on a purchase of ₹10 lakh will translate into ₹20,000 savings. On the contrary, paying with cash gets you nothing,” said Kashif Ansari, assistant professor, OP Jindal School of Banking and Finance.
The savings made vide credit cards can be in the form of annual fee waiver, regular rewards offered on the card, accelerated rewards and milestone benefits. The latter refers to additional rewards that a cardholder gets on breaching a predetermined spending limit, which is usually quite high.
Nishant used Axis Atlas card that offers accelerated rewards on three annual spending milestones of ₹3 lakh, ₹7.5 lakh and ₹15 lakh. “With the car purchase, I achieved the ₹15 lakh milestone and earned 10,000 edge miles,” he said. The 10,000 edge miles translate into 20,000 air miles in the case of Axis Atlas.
“A lot of cardholders use credit cards for car purchase mainly to reap milestone benefits and exhaust annual spending limits for card fee waiver,” Mandal of Technofino said, adding that a good strategy is to use multiple cards to maximise savings. Talekar did exactly that. He used four cards and got the annual fee waived on three of them. The fourth card earned him a welcome bonus of ₹500. This ensured savings of about ₹15,500 in total. “Three of these four cards are low reward cards and earned me only about ₹1,500 in rewards. But, the aim was to exhaust the annual spending limit so that the renewal fee is waived,” he said. Talekar’s net reward return rate was about 5% amounting to ₹40,000-45,000. This includes the ₹15,000 he saved on the renewal fees. He also paid an additional transaction fee of about 0.8% (MDR passed by the dealer), which was brought down from 2% after negotiations.
Do note that the ₹15,000 saved by Talekar in annual fees is a form of indirect saving and so cannot be categorized as direct rewards or cashback.
Use of credit cards for car purchases is beneficial only when the buyer has enough cash to clear the dues within the billing cycle. Potential buyers should not confuse this method with financing a car on credit cards. Credit card loans carry an interest rate of over 15-25%, which is much higher compared to an auto loan. Financial experts say it is better to pay only the down payment with your credit card and get an auto loan to finance the remaining amount.
