Should You Use a Credit Card for a Down Payment?

• Author: William Asher
• Posted: 2023-12-06

When purchasing a house, a car, a large appliance, or many other things, a down payment is required. Generally speaking, after the down payment is given, the monthly payments will be generally low in order for the seller to ensure that the payments are being made. Only in rare instances like subprime mortgages do you actually see a company try to gouge people on a month to month basis. The better business practice is to have lower payments that can be met, which keeps both parties happy. In these tough economic times, however, more and more people are finding it harder to make down payments on things they need. People want to switch to more fuel efficient heating systems, or electric cars, and other things that will help them save on their energy expenses (and also to help the environment). But things are stretched very thin. The answer a lot of people come up with is to use their credit card to make a down payment on such an item. It seems like a no-brainer, if you have the credit; but is it really a good idea?

In America alone, a majority of adults have outstanding credit card debt. Around 6% of people have a lot of debt, over $10,000. Generally speaking, "debt" is a loose term. If you owe a few hundred dollars on a card that you can easily pay off, you are still technically considered in debt. So, as you might imagine, using a credit card for a down payment will greatly depend on the particulars of your situation. There are some things you want to keep in mind before you just go drop money on a down payment.

Depends on the Payment

The first thing to keep in mind here is the type of payment you will be using your credit card for. The total of the down payment is certainly a thing that matters. Just because you have a $10,000 credit limit doesn't mean it's a smart idea to eat into that amount with a $8,000 down payment. If you're going to use your credit card for a down payment, most financial experts agree that you should never extend past 20% of the credit you have available, unless it is an absolute emergency. The goal here is that you want to keep your monthly payments on your card lower, as you will also have to deal with the monthly payment of the item you placed the down payment on. Too high a credit card bill may leave you overextended.

Also keep in mind that some companies may want to charge you more if you're using your credit card. What they'll call this to be sneaky is a "cash discount," which is supposed to mean that you pay less if you pay with cash. But it's really just them giving you an up-charge for using a credit card, because they know they can.

Depends on the Card

Also keep in mind that certain cards have plans that are going to jolt up your monthly statement dramatically if you make a big purchase. Yes, they will consider a down payment on something a "big" purchase due to the dollar amount. Most people who need to use a credit card for a down payment are not dropping $200 or so; they're instead dropping a couple thousand. Your personal credit card's policy might be to actually charge you a higher monthly payment and even more interest if you make such a big purchase. Check this policy with your card before you use it for a down payment.

It Could be Beneficial

Then again, a lot of credit card companies really want to encourage this because it means more money for them once you pay it all off. So what some card companies are going to do is actually offer you lower interest rates for these sorts of bulk payments. And as most of you have probably seen on commercials, credit card companies love offering reward programs like cash-back policies, frequent flier miles, gas points, and other sorts of rewards. Again, this is something you're going to have to check with your particular policy. Every credit card is different, even if it's from the same company that offers beneficial policies. It all depends on your specific card.

So, to know whether or not using a credit card for a down payment is the right move, check with the policies of your specific card, and look into the structure of the down payment.