Buying stocks with a credit card, although possible, is typically frowned upon. The question of whether you should do it depends on your personal financial situation. In most instances, there are policies against it to protect you from losing the money you can’t afford, and then having to pay interest on lost money.
However, this doesn’t mean making the transaction is impossible. In this article, we’ll break down the process of buying stocks with a credit card and everything else you need to know about investing via credit.
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How to Buy Stocks With a Credit Card
It’s common for brokerages to prevent individuals from making stock purchases with their credit cards. This could be because of many reasons — they fear you won’t be able to pay the debt back or even because the processing fees are typically higher on credit card transactions.
Whatever the reason, this doesn’t mean that you can’t still use your credit card, you just have to know how to use it to make the purchase.
Get a Cash Advance
Most credit cards have a credit limit along with a different (often lower) cash advance limit. It’s considered a small, short-term cash loan, and will have to be paid back just like anything you purchase with your credit card.
You can get a cash advance through your credit card from an ATM if you have a pin number. Otherwise, you’ll have to pay the bank a visit.
Interest rates and the annual percentage rate (APR) on cash advances are often higher than the regular rate on purchases made through your credit card, making this a rather expensive option. It is important to be aware of these fees or you could end up owing more money than what your stock is worth.
Use a Balance Transfer Card
Getting a balance transfer card (upon approval) is one way to avoid interest fees. A balance transfer card is used to pay off high-interest debts, like credit cards. However, this doesn’t mean that you aren’t subject to additional fees to complete the balance transfer. These cards have limits that might be lower than your credit limit.
Redeem Credit Card Points for Cash
Many credit cards offer rewards programs, including the ability to redeem reward points for cash. Individuals can use the cash earned via credit card rewards programs to invest in securities.
While this seems like a simple alternative, there are a few things to be aware of if this is the route you choose to take. For instance, you’ll need to know whether to count this reward towards your annual income, depending on what type of reward it is and how you receive it.
Which Credit Cards to Use
Some brokerages offer their own version of a credit card. Individuals who are approved for this type of credit card have the ability to apply their rewards points into an investment account.
Holding a credit card that earns the most rewards points is a benefit of using credit cards for these purchases — not only do you get to earn more rewards points, but you get to apply these rewards towards more stock purchases, too. Popular examples of credit cards used to invest in stocks include:
- American Express Canada Platinum Card;
- Capital One Venture Card;
- Charles Schwab Card from American Express;
- Chase Freedom Unlimited Card;
- Citi Double Cash Card;
- Fidelity Rewards Visa Signature Card.
Risks of Buying Stocks With a Credit Card
Investing in stocks is always risky and typically you don’t want to throw all your hard-earned money into the stock market. Using credit — essentially borrowed money — increases your chances of losing big.
You can find ways to buy stocks with credit, but the risks are high and you’re going to have a difficult time making a profit once you figure in the fees and interest charges associated with using credit. If you’re looking to start investing in your future today, consider something less risky like preparing for retirement with savings.
If you decide to take a cash advance from your credit card to pay for your stocks, be aware that you will probably end up paying a fee, either a flat rate or a percentage. A $3 fee is also possible if you obtain your cash through an ATM.
If you use a credit card and don’t immediately pay off the credit card, you will eventually get hit with an interest fee that is typically between 10% and 20%, or more, depending on your card. In 2020, the average APR rate was over 16%.
Additionally, cash advances often have even higher interest rates and usually offer no grace period. Cards like Chase Slate charge a $10 or 5% fee (whichever is greater) and then 24.99% interest on top of the fee.
Inability to Pay Back the Money You Invested
Just as with any loan, the ability to pay back the money you borrowed is a potential risk. The same goes for using your credit card to invest in stocks.
If you’re unable to pay back the money you essentially borrowed, it can worsen your financial situation by placing you further in debt as you rack up fees commonly associated with owning a credit card. You can avoid credit card debt by refraining from investing in stocks with money that isn’t exactly yours to spend.
If you choose to use your credit card to invest in stocks, it’s crucial to know that you are at risk of falling victim to fraudulent transactions. If you find that an investment professional is insisting you use your credit card or pressuring you to invest large sums of money, this may be because they aren’t a part of a legit firm and are going to scam you.
In fact, the Securities and Exchange Commission claims that “most licensed/registered investment firms do not allow customers to invest using credit cards.” To avoid being a victim of investment fraud, you can use a free search tool to learn more about the firm you are using.
Alternative Credit Card Investment Options
Since there are risks associated with investing in stocks via credit card, it is important to be aware of the viable, safe ways to invest using a credit card — these include:
- Take advantage of credit card rewards: Open a credit card that offers rewards, get the most out of your rewards that are offered, and invest that money in some way;
- Utilize investment apps: There are tons of investment apps — such as Acorns, Stash, and Robinhood — that can help you build money while using a credit card.
Safer Ways to Get Money to Invest in Stocks
If you’re deciding that using a credit card to invest isn’t for you, yet you’re still wanting to find ways to earn money to invest, you can do so by:
- Calculating stock investment money into your personal budget;
- Find a side hustle and use these earnings strictly for investing;
- Sell or pawn unwanted items for a little extra cash.
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