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Don’t Use a Credit Card for Investing. Here’s Why.

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If you have a credit card with available credit and you’ve just spotted a great investment, you might be tempted to use your credit card to get into the investment. However, that could be a huge mistake - one that could leave you with credit card debt and no value in your investment. Here’s why you shouldn’t use your credit card for investment.

The Cost of Investing With a Credit Card

Using a cash advance to invest makes investing more expensive. Cash advances are one of the most expensive types of credit card transactions. Some credit card issuers will treat the transaction as a cash equivalent transaction, meaning it's charged the same fees as a cash advance.

If your investment is treated as a cash advance or cash equivalent transaction, you’ll pay a cash advance fee, typically a percentage of the amount of the advance. Cash advance balances also have a higher interest rate and no grace period. That means interest starts accruing on your balance from the day you make the transaction.

You’ll automatically have more in debt than you have in equity the instant you use a credit card cash advance to invest. And if you’re paying fees to a broker, your investment has to grow even more before you start to see a return.

Of course, you’re investing with the expectation that your investment will grow. However, you have to factor in the possibility that value of your investment could drop. And if that happens, if you lose your entire investment, you’ll still have to pay back your credit card balance plus interest. Investing with cash you’ve saved up and set aside for that specific purpose leaves you with no outstanding debt even if you lose out.

Does Your Credit Card Issuer Allow It?

Your credit card issuer may not allow you to use your credit card in certain places. Even if you have enough available credit, you may not be able to use your credit card for the investment. For example, many credit card issuers have banned cryptocurrency purchases with credit cards. While it may seem like an inconvenience for those who want to invest with their credit cards, it’s a measure that also prevents you from making a decision that could land you in more debt than you can afford to repay.

Can You Make an Exception?

There may be a narrow set of circumstances where investing with a credit card won’t hurt. If the broker processes the credit card as a regular purchase transaction, doesn’t charge an additional fee, and you have the cash pay off the credit card balance before the grace period ends and you actually pay off the balance. In that case, you’re essentially using the credit card as a form of electronic payment and you won’t pay any additional fees or interest. Otherwise, it’s better to use your checking account or debit card for your investments.

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Comments 1

Frank on Saturday, 19 May 2018 14:35

I would never advice to make investments with a credit card. WAY to risky.

I would never advice to make investments with a credit card. WAY to risky.
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Friday, 23 August 2019

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