Using rewards to buy a new car

Some cards earn down payment credits at auto dealerships


Cashing In
Cashing In columnist Tony Mecia
Tony Mecia is a business journalist who writes for a number of trade and general-interest publications. He writes "Cashing In," a weekly column about credit card rewards programs, for

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Question Dear Cashing In,
I know I'm going to need to buy a car in the next few years. The other day I saw an ad in the mail for a credit card that lets you earn reward points you can redeem to cut down the cost of a car. That sounds like something I might be interested in. Is it a good deal? -- Gerald

Answer Dear Gerald,
Any time you're evaluating a rewards credit card, you have to look closely at two things: how you earn points and how you spend them. If you understand how those two aspects of a card work and have a good idea of your spending habits and reward preferences, you can make a well-informed judgment about whether a particular card is right for you.

Here, I believe you're talking about a class of cards that are issued by banks in partnership with automobile manufacturers. Some of the best-known examples are the Capital One GM BuyPower card, the Toyota Rewards Visa, the Lexus Pursuits Visa and the American Express Mercedes-Benz card. These all work in a similar way: You can use the cards anywhere and earn reward points, and typically you earn extra points for using the card at a dealership -- say, for parts or service on an existing vehicle. When you go to buy a new car from a dealership, you can reduce the purchase price by cashing in the reward points. 

For instance, the Toyota Rewards Visa (no annual fee) offers 1 point per $1 of purchases but 5 points per $1 on purchases at Toyota dealers. When it comes time to redeem, each point is worth 1 cent at a dealer. So if you have charged $10,000 in groceries and gas, that's 10,000 points, or $100 in rewards. If your old Toyota needed some work under the hood and you spent $2,000 fixing it at the dealer, that's also 10,000 points, or $100 in rewards. Rewards can be redeemed toward the purchase of a new car or toward parts and service.

The Mercedes-Benz card is a little different. It accrues American Express Membership Rewards points and sends you a $500 gift certificate every year you spend $5,000 on the card. The certificate is redeemable toward a new car purchase or lease. 

With the AmEx Mercedes-Benz card ($95 annual fee) you earn 5 points on purchases (excluding loan or lease payments) at Mercedes-Benz dealerships, 3 points at U.S. gas stations, 2 points at U.S. restaurants and 1 point on all other purchases.

The GM card (no annual fee) offers 5 percent back on the first $5,000 in spending per year -- regardless of whether you spend it at a dealership or not -- then 2 percent back for the rest of the year, and the rewards earned must be spent toward a new car at a dealership. So if you spent $10,000 on that card in a year, that's worth $350 in rewards.

One of the big downsides to this class of cards is the lack of flexibility: The rewards are tied in to the car dealership, so you'd better be sure that those are the rewards you want.

These cards probably make the most sense for devoted customers of a certain brand of car. For instance, if you love Chevy pickup trucks and know for certain that you will buy a new Chevy pickup from a dealer, the GM card could make sense. Or if you own a Toyota or Lexus and take it in regularly for service at a dealer, earning 5 percent back in points spent at dealerships is compelling. 

However, if you're not devoted to a certain car brand, you might be better off with a standard cash-back credit card, which typically offers 1 percent to 2 percent back in statement credits or a check. Obviously, cash is much more flexible than points redeemable only at dealerships.

Gerald, if you're a big aficionado of one automotive nameplate, one of these cards could work for you. If not, consider other options. Good luck!

See related: Buying a car with a credit card often an uphill fight, Steps to building your credit before 1st auto loan

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Published: October 7, 2014

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