Down payments on credit cards?

Ran across this article on Yahoo! Finance by Robert Kiyosaki:

The article describes his and his wife's experiences with making a down payment for a house — with credit card debt.

This strategy ended up working for them, so the story goes, as they bought properties from which they were able to squeeze positive cash flow, after paying the debt service. At the time, they didn't have any other options at the time for making the down payment, aside from waiting until they could obtain more conventional financing or pay cash.

At the time, as well, their friends chided them for making such a risky move.

And it is risky! And it's also not for everyone! Especially if you already have credit card debt. If you don't know what you're doing and don't know your market like the back of your hand, you could either acquire the need for debt reduction or add to the debt reduction problem you have.

Now, if you're absolutely flush with cash and know exactly what you're doing, then there might be a place for doing this, especially if the window of opportunity on the purchase is slamming shut. Opportunities have an expiration date, so act swiftly or miss out.

Gary North, in his Reality Check, responded to a reader's question in part by saying that he didn't have enough mortgage debt. (That's not a misprint!) Now, the context of this is that the reader is in good financial shape, and that fixed rate mortgage debt allows you to pay at a fixed rate of interest for 30 years. The dollar payments don't change, but the value of those dollars is likely to go down, so it's an advantage to have a low-rate, fixed, long-dated mortgage since you'll eventually be paying with depreciated dollars.

In contrast to this, credit card debt is not fixed rate — it changes with the prime rate, and can change dramatically if you miss a payment. This is not the kind of debt you want hanging around for a long time. Your payments could go through the roof at the drop of a hat, even for something unrelated to your ability to pay that debt. Even if you got a good deal on the property, piece of capital equipment, or whatever, the deal could end up being lousy if you have to pay 24% interest on that loan all of a sudden.

I agree with a lot of the very broad principles that Robert Kiyosaki champions, and using debt as an instrument to acquire something of value that will bring back more than it costs you to service the debt is one of them. His writing leans on the simple, maybe even simplistic, side, and as such, it's accessible, but lacking a lot of detail. Statements like the following:

“‘Debt is not the problem,' my rich dad said. ‘It's what you buy with debt that can cause you problems.'”

are true, but putting this in an article that talks about using a credit card to put a down-payment on a house implies that it's all right to do this, because “what you're buying” is a good thing to buy. It's only a good thing to buy if you know what you're doing! Otherwise, it's a debt load that you'll need to get rid of in addition to dealing with all of the headaches of what you bought.

So, be sure you know what you're doing if you follow this advice.