Car dealerships looking to keep their competitive edge have a new idea contending for their attention: accepting credit cards for down payments or even for full payment.

Traditionally dealerships never offered this option for the simple reason that there was little demand. Why would a consumer volunteer to pay 13-29% credit card interest if you or a financial institution offered them a loan for a fraction of that? Since there’s no good reason, consumers never asked.

That’s changed, mostly because people’s use of credit cards shifted dramatically in recent years. The recession trapped many Americans in a frightening debt spiral with their credit cards, where a missed payment catapulted their interest rates into the 30% range only to have it stay there for months before coming back down – assuming they could keep their new, higher payment current.

Merchants Won Against the Credit Card Companies

At the bottom of the recession Congress tried to reign in some of the more egregious consumer credit card terms with the CARD Act of 2009.

But that didn’t change the merchant’s terms. The credit card industry’s long-standing policy that forbid a merchant from breaking out the interchange fee to charge it only to people using credit cards remained in place. You’re familiar with this in your accessories and parts and service departments where you – along with every other merchant in the country – have probably been adding the 2-4% interchange fee to all of your merchandise, which had the unavoidable consequence of requiring your cash, check and debit card customers to pay it right along with those using credit cards.

Many merchants found that unjust, and some huge nationwide chains initiated litigation against the policy a solid twenty years ago.  Their efforts finally bore fruit in January, when the credit card companies lost. Now it is perfectly legal to show your cash price and to add the interchange fee to it when a customer wants to pay with a credit card.

But it was a pyrrhic victory. Few merchants have changed their pricing policies and that seems likely to remain the case, because advertising the fact that you “penalize” a credit card user gives your competitor the opportunity to claim that he doesn’t.

Instead, some merchants – most notably gas stations – reward customers who pay with cash, check, or debit. Same difference, but when it comes to closing a car sale this difference means a lot.

New Numbers for the Credit Card Game…

As is the case with everything else you do during the F&I part of the sale, you need to know your numbers cold if you want to stand any chance of explaining them to your customer. So here are the main ones to keep in mind:

• People with fair credit pay an annual fee between $19 and $99 just to have the card, which then charges them 22-26% APR. To pay a $5,000 loan in one year at the best rate would require a $468 monthly payment and would ultimately cost $5,616.
• People with excellent credit don’t need to pay the annual fee and are charged between 11.99-22.99% APR. At the better rate that one year, $5,000 loan would require a $444 payment and would cost $5,331.
• One late payment and all that flies out the window; penalty rates are usually three times the base rate.
• The maximum interest rate credit card companies can legally charge is infinity.

…And Why Those Numbers Don’t Matter

A few non-number facts to know:

• Most Americans no longer think of their credit cards as sources of credit.
• The customer standing there with her card probably has the funds to cover her payment and has no intention of carrying a balance on her card.
• Most likely, she just wants to get the cash back or reward points from a big transaction.

That’s the consumer’s reality.

Your reality is that the interchange fees on a down payment would consume most – if not all, or even more than all – of your profit.

But you can’t just reject the credit card out of hand, because if that customer expects cash back or rewards points then turning down their card increases their outlay. It may not be much, but as you know sometimes it’s the little things that sour a deal.

How To Convert A Credit Card Down Payment

Instead, consider offering them a benefit for paying you with a check instead. You can’t offer points, but keeping in mind that cash back rewards rarely exceed 1.5%, you could offer a gift equal to 2% or more of the down payment.

For $5,000, that would be $100 at most, and at that value you’d be beating what they would probably earn from using the card. Make it a voucher for your service department or a gift certificate for use in your accessories shop, and your out-of-pocket expenditure may be less than the face value of the gift.

You can also motivate your customer to keep her money local. Interchange fees exceed the cost of the cash back reward, and the difference goes to the credit card company as profit. Why let that money anywhere when keeping it local can have a profound multiplier effect benefiting your customer’s community? You create local jobs, you support local sports teams, you give money to local charities, and you’re the place she’ll come to when she needs repairs or, for that matter, another car. You’re invested in your community, and this is one way you can use it to your advantage.

By steering her away from her credit card you might even be able to help her reduce her loan payments. If she has funds on hand, you could offer the ability to make a larger down payment by writing you two to four checks to be deposited over time. If you can include her future savings in today’s down payment, she might qualify for better terms. And she couldn’t do that with her card without paying interest that would almost certainly exceed the savings she might get through a better loan.

Rather than frown when the credit card question arises, use it as an opportunity to engage that customer more deeply with your business. As soon as she asks the question, think of her shopping in your store for a cool jacket with your car brand logo emblazoned across it, and telling her friends that she decided to keep her money local for the benefit of the Little League team. Get the tools you need to make this happen here.