Should You Use Credit Card to Make Downpayment?
If you’re allowed to, you should definitely use a credit card for the purpose of making a downpayment. But why? Well, that’s what we’re here to answer. In order to do that, though, we have to start with a short introduction into the concept of down payments.
What is a downpayment?
A downpayment is like a deposit; a sum of money you put down (hence the term ‘down’ payment) in order to guarantee you can buy whatever it is you want to buy.
Why don’t we just call it a deposit, then? Because legally speaking, there is a difference; a deposit is paid to the seller so that he won’t sell it to someone else. The ability to pay the downpayment is required to get a bank loan (because Malaysian banks typically only lend a maximum of 90% of the total purchase price or market value of a house or a car).
Either way though, a downpayment is usually a substantial amount of money (if you buy a RM1 million house, the minimum downpayment is RM100,000), and if you could put down that much money at once, why not use your credit card and get the reward points (or the cashback)?
At the same time, if you had access to that much cash, you could also take advantage of the interest-free period on your card to earn some more cash (even a 1-month fixed deposit at 3% p.a. would earn you RM250). That’s free money on top of whatever else you get from your credit card.
What are the factors you need to know?
Now, of course, using your credit card to make a downpayment depends on several factors.
Does the vendor (real estate agent or car dealership) allow the use of credit cards for this purpose? Is your credit limit sufficient (either on one card or on all of them)? Are you going to get charged a fee for doing this? You should consider all of this before deciding whether to use your credit card for your downpayment.
The fundamental issue here, though, is whether you can pay off your statement balance (including the downpayment) in full and on time. If you cannot, then all the reward points and cashback from your credit card(s) will be useless, as you will then be charged up to 18% p.a. on the outstanding balance. So, you need to make sure that you have access to the full downpayment total in cash.
You may also be wondering which credit cards are best to use for your down payments.
This very much depends on the vendor/merchant you’re using. In general, however, you should look out for credit cards who will offer you a high credit limit so that you can maximise the benefit of putting the downpayment on it
If a cashback card, it should have both a high cashback rate and a high (or no) cashback ceiling; if a credit card offering reward points, see if you can get one that gives bonus points for dealing with that particular merchant and/or one whose redemption programme suits your needs (the same item may cost double the points from one credit card as compared to another).