Putting your dinner tab or a pair of shoes on a credit card is pretty typical. Using a credit card for a down payment on a house or car, however, is not — the APR on credit cards is generally considerably more than on a loan — even a subprime loan.
Because of the hefty credit card APR that’s often associated with big purchases — on both the seller’s and buyer’s ends — using a credit card for a down payment might not always be the best route, even if you have a great rewards card. Review these examples of how and when you should and shouldn’t use a credit card for a down payment.
Should You Use a Credit Card for an Auto Loan Down Payment?
For the first time ever, auto loans rose above $1 trillion in 2016. The total balance of open car loans rose to over $1 trillion in Q1 of 2016, up from $905 billion during the same time last year, according to Experian’s State of the Automotive Finance Market report.
Along with all these loans comes a lot of down payments. Making a down payment can be tricky if you’re strapped for cash — or it can be an opportunity to rack up credit card rewards if your card offers them.
Before you start planning your vacation with all those rewards you’ll get, make sure the car company lets you pay by credit card. Some do and some don’t.
CarMax, for example, doesn’t allow buyers to use credit cards for down payments. You can make the payment with a debit card, check or cash — but not a credit card. Ask the all-important question before you head to the lot: “Can you buy a car with a credit card at your dealership?”
Car dealerships don’t allow credit cards as a form of payment for a couple of reasons. They have to pay transaction fees — which average from 1 percent to 4 percent of the purchase price — to credit card issuers, which eats into their profits. In addition, credit card holders have chargeback rights, which gives them the right to ask for a refund if they feel they’ve been wronged. For example, you could put your transaction into dispute and it would delay payment to the dealer for as long as the credit card company is investigating it. Dealers typically don’t want to take on that much risk.
Dealerships that do allow credit cards for down payments often charge convenience fees, so ask about fees before you swipe.
Sky-high APRs for credit cards can make it too expensive to charge an entire down payment if you can’t pay off the balance right away. Take American Express’ Starwood Preferred Guest Credit Card, for example. The annual percentage rate on this card is between 16.24% to 20.24% compared with a subprime new car loan, which could cost you 11.35 percent in interest if you have a credit score of 600 or lower. To avoid unnecessary credit card debt and high interest rates, consider saving up for a down payment rather than charging it.
Find Out: Dumb Credit Card Mistakes You’re Making
How to Use a Credit Card for a Down Payment on a Car
If you have enough available credit to pay for the down payment on a vehicle, call dealerships to find out if they accept credit cards as payment and if they have a limit on credit card usage. Although some dealerships might accept credit cards, they could have a cap on how much you can charge.
You can also use a credit card to get a cash advance and use the money toward your down payment. This can be a costly way to use your credit card, but it will work.
Before you treat your credit card as an ATM machine, however, research its cash advance fees. Some card companies will charge you a flat rate and others will charge a flat rate plus a percentage of the transaction.
Also, if you get a cash advance on your card, have a repayment plan in place. Cash advances usually accrue interest, which you can minimize by paying back the advance as soon as possible.
Should You Make a House Down Payment With a Credit Card?
Technically, you can make a down payment on a house with a credit card if you get a cash advance. If the house is cheap enough and your credit limit is high enough, you could even buy the whole house on your card, according to Nasdaq. If you have an FHA loan, however, you likely won’t be doing this — these loans are designed to prevent homebuyers from getting into mortgage loans they can’t afford, and using a credit card as a down payment might be a red flag.
Mortgage servicing companies typically don’t allow you to pay for your mortgage each month on a credit card for the same reasons as dealers don’t like to let buyers use credit cards as down payments. If you really want to pay your mortgage with a credit card, however, you can use a third party like Venmo or Tio, which will do that for you — for a fee. Check out those fees before you make a decision.
How to Come Up With a Down Payment on a House
Instead of paying hefty cash advance fees and high interest, there are other ways to get money for a down payment. Depending on your employer, you might be able to get a loan from your 401k.
You likely are wary about delving into your retirement savings — for good reason — but if you’re investing in a home and need a down payment it might be a good time to tap into them. Check with your plan’s administrator and get all the details about taking out a 401k before you make a decision. Because plans’ — and employers’ — rules differ, it’s crucial to know how taking a loan will impact you financially.
Using a credit card to make a down payment is probably not the best financial decision because the interest rates are almost always higher than even those on subprime loans. If you want to use your card so you can take advantage of generous rewards programs, remember that paying off your credit card balance before that interest kicks in is key — otherwise, you might negate any perks you stood to gain.
Barri Segal contributed to the reporting for this article.
Editorial Note: This content is not provided by American Express. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone and have not been endorsed by American Express.