Vision Credit Education, Inc.

Major credit purchases are normally recorded on credit bureau reports. It goes without saying that you should generally put as much money toward a major purchase as is safely possible in order to reduce your borrowing costs. However, a down payment may not be the best approach.

Credit Scores Ignore Trade-Ins and Down Payments

Imagine making that next vehicle purchase. You know that a new vehicle will likely cost $20,000 or more. Putting a large down payment has many positive results:

• Reduce total finance charges
• Gain possible lower interest rate
• Reduce repayment term
• Reduce monthly payment amount
• Prevent negative equity (upside-down) situation

While most of these benefits tend to be true in any situation, there is a better way to put money down to reduce the overall borrowing costs.

Large First Payment Instead of Down Payment

When you borrow money, the original loan balance is recorded on your credit reports. As you pay down the balance, your credit score tends to improve because your overall debt to original balance ratio is lower.

By holding onto your cash to borrow the maximum amount, a higher initial loan balance is reported to the credit bureaus. Then you can make a principal payment a day or so after your loan is originated to pay down the balance. The key here is that you MUST designate that the payment be put towards principal only. Otherwise, the lender will likely apply it to future interest costs rather than actually reducing your borrowing costs.

You may do this by telling the bank or credit union to apply your extra payment toward the principal. If sending a check for an extra payment, you may write in “Principal Only Payment” in the memo line of your check.

The result is that you actually get credit (pun intended) for the extra payment, whereas a down payment would be completely ignored on your credit report. It may be possible to see a quicker boost to your credit scores due to a more rapid repayment of your debt.

Sometimes it is better to put money down in order to get a lower interest rate. This is often true if you have limited or poor credit.

However, if you are applying directly with your bank or credit union, then you already would know if you qualify for their lowest published rate regardless of the down payment. You find this out simply by applying for the maximum amount.

In the end, there is not a huge difference in how you put additional money toward your major purchase. By making a large initial payment instead of a down payment, then at least the credit bureaus can see the money that you paid.