Paying for credit with credit: Good idea or bad choice?

by Kristina on July 2, 2014 · 6 comments

Car

Good morning Dinks.  Remember a few weeks ago when I wrote about the crazy idea of paying for a car with a credit card?  Well we had an influx of comments with people telling us all the crazy things they bought on their credit card.

J. Money from Budgets Are Sexy actually bought his Cadillac on his credit card with a low interest check he got in the mail.  Dee from Color Me Frugal and her husband actually tried to buy a car on their credit card and the dealership wouldn’t let them because the dealership didn’t want to pay the administrative fees.  JP bought his roommates car on his credit card because the roommate wanted to pay cash and JP wanted the rewards points.  It was a win-win for both of them.  Dillon bought his motorcycle on a credit card to earn the reward miles.  He paid off the balance in full at the end of the month when he got the bill.

So here’s the question – should you make major purchases on your credit card?

Paying for a car.  I stand by my decision not to buy a car on my credit card.  I don’t want to say I would never do it because over the years I have learned never to say never.  However a credit card wouldn’t be my first choice of a payment method to buy a car.  The interest rate is probably higher than financing through the dealership.  However if you aren’t approved for financing through the dealership paying with a credit card is a good alternative.

Paying for a down payment on your home.  Yes this really happens, I’ve seen it.  Throughout my ten year banking career I have seen at least three people try to purchase their home on their credit card.  .  This is an absolute financial no-no.

There are three major problems with trying to pay for a down payment on your credit card.  First off banks don’t like it when clients try to pay for credit with credit, it shows the bank that you don’t have the ability to save.  Secondly paying for credit with credit is a red flag, it shows lack of financial responsibility.  Banks want you to have as few payments as possible when they approve you for a mortgage loan, adding on a payment to your credit card is not favourable.  The last problem with trying to pay for your mortgage with a credit card is it will be treated as a cash advance.  This means you start paying interest right away and the interest rate is high.

The benefit of making big purchases on your credit card.  Of course the major advantage of making big purchases on your credit card is earning rewards points and cash back.  If you charge $20,000 for a car on your credit card I think we can all agree that equals a lot of rewards  points.  It may even be enough to get a free trip for two.  Keep in mind that you do not earn rewards points and cash back on cash advances.  If you have the money to pay off your big purchase right after charging it onto your credit card it may be a smart financial move.

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{ 4 comments… read them below or add one }

1 Michelle July 2, 2014 at 5:58 am

I think it’s fine as long as the place does penalize you with a higher cost (such as places that charge you a fee for using your credit card in the first place) because of the potential of rewards points that you may be able to earn.

2 Hannah @ Wise Dollar July 3, 2014 at 3:55 am

Great post.. I think it truly depends on the person using the credit card. As long as the individual knows his/her limits, then applying a credit card is not a problem!

3 Miel July 3, 2014 at 10:29 am

About a decade ago I worked in IT in development and my work’s purchase policy was such that I had to use my personal cards for lots of stuff you wouldn’t typically buy, i.e. a $5k solar inverter for DRCongo, photocopier, numerous laptops, and later $20k in visa processing fees in Dubai (that has a story to it).

Aside from dealing with reimbursement it was worth the extra reward points. It also means I now have high limits and a low credit to limit ratio, which makes my credit score as good as it gets.

I joked that when I moved to Afghanistan that visa might call my husband to say I was last seen in Dubai and must be trouble because I was suddenly no longer spending money. ;-)

Cheers,

Miel

4 Kristina July 9, 2014 at 9:49 pm

@Miel – that’s definitely a perk. It’s always hard for me to try and get reimbursed by my company for expenses. Actually not hard but it takes a while.

@Hannah – Staying in limits is definitely a key. But sometimes high limits lead to temptation spending. Not good.

@Michelle – I notice that happens a lot in stores that offer loyalty rewards. Sometimes I pay higher prices just to get rewards and that’s just not right.

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