Bigger purchases like cars and houses usually require a down payment, which is money upfront. Unfortunately, not all of us have thousands of dollars at the drop of a hat to put money down on the big purchases we need to make. There are several compelling reasons to look at putting a down payment on a credit card. Let’s explore all the options and weigh the pros and cons.
The only way you can really use a credit card for a down payment on a mortgage is to get a cash advance. Basically, you put a balance on your credit card in order to get that amount in cash, and then make payments like you’re paying down a regular credit card balance.
This is an option if you’re in a pinch for the cash, but it’s really a more viable option if you have the cash already and want to reap the rewards. Say you have the cash already, but you have a credit card that will reward you for a cash advance balance. Now you have several thousands of dollars of rewards and you can pay off the balance immediately. Be wary of fees, however. Most credit cards charge a percentage of the cash advance, on top of the interest on the balance. Even if it’s a small percentage, because mortgage loan amounts and down payments are normally higher, (20% down payment is the norm), the amount you’re putting on your credit card can add up pretty quickly.
Best Credit Cards for Down Payments
If you’re going to use a credit card to make your down payment, deciding what you’re looking for is the first step. Is the most important thing to be interest-free? Are you looking to reap big rewards? Here are some things to consider.
Most rewards cards work on points or cash for dollars spent, which can range from 1-5 points for every dollar spent and generally between 5% - 20% cashback. That means for a $3,000 payment, you could make up to 15,000 points at one time or $150. Points in that amount are difficult to accrue with everyday spending.
- Southwest Rapid Rewards: This card has three-tiered options for personal use the Plus Card, the Premier Card, and the Priority card. Each one has an introductory offer as long as you spend $1,000 within the first three months of opening your account. A down payment could easily cover that introductory spending. If you live somewhere where Southwest is a viable option (can’t beat free checked bags and open seating!), or if you already fly Southwest, this introductory offer goes a long way. Drawbacks are the high annual fee and high APR which range from $69-- $149 and 16.24% -- 23.24% respectively.
- More specific rewards cards: Almost every hotel franchise or airline has its own credit cards, some with more rewards than others. Think about where you like to shop or travel, and what makes the most sense for you. Get rewarded for your big purchase by getting some points toward your next vacation.
- Discover It® Cash Back: As far as cash back cards go, this one is pretty compelling. Discover will actually match the cash back you earn for the first year. That means if you earn $150 in the first year, you’ll get $300 back total. And with their cashback rates, you could earn that much just with a $3,000 down payment.
- Apple Card: This card doesn’t have the best cash rewards, but it’s the low fees that make it an attractive option. First, you can check your approval terms without impacting your credit score (they wait to pull your credit until after you know the terms). They also don’t charge annual fees, late fees, or foreign transaction fees, so it’s a pretty cheap card to maintain. As far as the cashback goes, you earn 3% on Apple purchases (which won’t help you when using this card for a down payment), 2% when using Apple Pay (again, not helpful unless the vendor accepts Apple Pay), and 1% when using their physical card. The most compelling thing about this card may be its payment tracking. Each month you can adjust your payment amount on a wheel that shows you how much interest you’ll pay depending on your payment. Visually, they make it very easy to keep track of your payments and interest.
Related: Top Travel Rewards Credit Cards
Cards with 0% Interest Intro Periods
A lot of cards give you an interest-free introductory period, usually anywhere from 6-18 months. That means that you won’t pay interest on purchases made during this period, as long as you pay off those purchases before the introductory period. So say for example you put a down payment of $3,000 on a credit card with an 18-month interest-free introductory period. You want to make sure you have a plan to pay off the full $3,000 within 18 months to completely avoid paying interest. That would mean making payments of about $167/month. Doesn’t sound too bad, but make sure you consider that on top of your car and insurance payment or mortgage/rent payment.
As long as you have a plan to pay off your down payment within the interest-free period, this can be a good option to free up some cash and still make your large purchase. Here are some good cards with interest-free periods.
- Wells Fargo Cash Wise Visa: In addition to an interest-free period of 15 months, this card offers $150 in cash back when you spend just $500 in the first three months. That’s a pretty big chunk of cash for how much you have to spend. This one also offers cash advances.
- Citi Double Cash Card: This card is different because you earn cash back as you spend and as you pay. So 1% cashback on purchases, and then 1% when you pay those purchases off. This could be good if you have the cash on hand you can earn double the points right away.
You could reap some pretty big rewards.
- As mentioned above, you can get some pretty hefty rewards from putting a big purchase like this on a rewards credit card. So much so that even if you have the cash for a down payment it may be worth checking to see if your dealership accepts credit cards. If you can put your down payment on a credit card and pay it off right away, you may as well get the points.
- If you don’t have the cash in a lump sum, this is still a viable option as long as you have the cash flow every month to keep up with payments. Be very careful here the rewards may look nice upfront, but unfortunately, you can’t pay your credit card bills with airline miles.
You don’t need to have all the cash for a down payment.
- Not many of us are blessed to have thousands of dollars to spare when we need them. It goes without saying that putting a down payment on a credit card can help you get your big purchase without having to save for months and months. This is a huge plus, especially if you’re in need of your purchase right away. Again, just make sure you will have the monthly cash flow to pay it off fairly quickly even if you have to pay a little bit of interest.
You can build your credit.
- If you are able to successfully make a big purchase and pay it off on time, this can be a huge boost for your credit history. Showing credit bureaus that you can responsibly pay off a large sum will have the tendency to affect your credit positively. Making timely car or mortgage payments will already help your credit score, and adding this can boost your credit that much more.
You’ll have multiple payments to juggle.
- In order to responsibly keep up with your credit card payments, you’ll need to play to pay a set amount every month, in addition to the payments you’re already making on your big purchase (car, mortgage, insurance), and your other bills. If you make a down payment directly to a vendor, you’ll have one less payment to juggle.
It could eat up your credit limit.
- If you’re going to put a large sum on your credit card that will be paid down in smaller chunks, be wary of the credit limit on that card. Once you get over that ratio, it can start to negatively affect your credit score, especially if that ratio is going to be maintained over several months.
You could end up paying a lot in interest.
- If you’re going to be paying interest on your down payment, keep your APR in mind. Most credit cards have significantly higher rates than dealers and banks that can give you loans.
Some vendors just won’t let you do it.
- For all purchases, accepting credit card payments usually means the vendor incurs some sort of cost on their end. For that reason, not all places will accept a credit card payment, especially on a purchase that big. Make sure you verify the vendor will accept a credit card as a form of down payment. Being on the hook for several thousand dollars cash is not something you want to be surprised by.
What purchases require down payments?
With a few exceptions, cars and real estate are the biggest purchases that usually require down payments.
How can I avoid paying interest?
Interest on credit cards is accrued on a monthly basis. To avoid paying interest on your credit card purchases, you need to make sure you pay off the entire balance before the end of the month. This is obviously easier to do the smaller your balance is. For that reason, it is advisable to make a larger purchase, like a down payment on a card with an interest-free introductory period.
Will I pay more interest on a credit card or a loan?
Generally, credit cards have much higher interest rates than personal, mortgage, or auto loans. Even through a car dealership, your typical interest rate is lower than credit cards by several percentage points. Consider this when deciding whether you want to put a down payment on a car or mortgage, versus doing everything through a bank or dealership.
Making a down payment on a credit card can be done either through a cash advance or by placing a balance directly on your card. But in any case, proceed with caution. Because of the high-interest rates and fees, it is generally not advisable to use a credit card for a down payment unless you have the cash on hand and are ready to reap all the rewards (cash back or points). If you cant get rewarded, at least make sure you have a 0% interest period, and have the monthly cash flow to keep up with payments.