Cashing In Q&A columns

Using rewards to buy a new car


Some credit cards earn you rewards that can be used as an auto down payment, but consider alternatives such as cash-back cards, too.

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QuestionDear 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

AnswerDear 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 and the Toyota Rewards Visa.

These and similar automaker credit cards 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 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.

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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