Traders are always looking for ways to find more money to invest in their favorite opportunities. Credit cards seem like the obvious choice because they are an easily accessible source of funds. But can these cards be used for trading? We investigated, and here is the answer.
Can You Use a Credit Card to Buy Stocks?
Yes, a credit card can be used to buy securities, but it is not a good idea.
In fact, most reputed brokerage firms would not allow it.
Several risks are associated with using a credit card to fund your stock market investments.
Spending borrowed money to trade can be extremely dangerous for your financial health.
In later sections, we will discuss more reasons why you shouldn’t try it.
Having said all this, credit cards aren’t always bad.
There are other interesting ways in which they can help fund your investment account without borrowing money.
This is another topic that will be touched upon in the article.
But first, let us look at places where you can or cannot use a credit card to buy shares.
Can I use a Credit Card to Buy Stocks on Robinhood?
No, Robinhood does not let you purchase stocks using a credit card.
Traders must link their bank directly with the brokerage account to add funds.
In fact, none of the biggies of the investing world, such as Charles Schwab, E*Trade, TD Ameritrade, or Fidelity, allow this.
In each case, only direct checking accounts can provide money to purchase shares.
Where Can I Buy Stocks with a Credit Card?
The only trading firm that lets investors use credit cards for buying stocks is Stockpile.
Keep in mind, though, that the facility is not free.
There’s a 3% charge on whatever amount is transferred from a card to the broker.
This applies even to Apple Pay users.
Moreover, Stockpile is not free for securities like Robinhood or other apps.
It charges a $0.99 trading fee for every transaction.
Moreover, there might be other problems, such as cash advance fees applicable for purchasing financial products through cards.
In case you miss your due date, late payment and interest charges can also be levied by the credit card issuer.
Risks of Buying Stock with a Credit Card
Why is using credit cards to buy stocks considered risky business?
The biggest reason is that we are borrowing money which can easily turn into naught in one throw of the dice on the markets.
But it is not the only problem. We discuss some of these points below.
Stocks Carry Inherent Risk
Warren Buffet was once asked by someone where they should invest their money.
He immediately questioned back about the credit card debt they owed.
Upon getting the answer, he simply responded that the entire sum should first go into repayment of the balance.
After all, the average credit card interest in America is 19%. Cash advance APR is much higher – 25%.
Not even the Oracle of Omaha can guarantee those kinds of returns!
But jokes aside, major indexes like the S&P 500 grow by about 7 to 10 percent, that too over the long term.
This includes high-quality securities with excellent market caps and solid fundamentals.
On the other hand, if a trader believes their investment can grow above 19%, surely the stock is more volatile.
This is because risks and returns are always proportional.
An asset that looks very attractive would have an equal chance of falling flat in most situations.
And that’s where the problem starts.
When it is time to pay back the dues, what happens if you have lost the money?
The answer is missed payments, which also entail:
- Late fees
- Interest charges
- A hit on your FICO score
Hence, if you must use a credit card, only borrow as much as you are sure of repaying.
Risk of Fraud
As we said earlier, a reputed brokerage account will typically not allow credit card funding.
If there are some such firms, they could be trying to defraud you.
The credit card details provided may get stolen, used for scams, or identity theft.
In fact, the SEC has issued several warnings against exactly such unscrupulous agents.
If you still wish to go ahead with a credit card, it is best to keep a hawk eye on your monthly statement and account activity.
Any extraordinary events should immediately be reported to the credit card issuer.
Using A Credit Card Might Force You To Make the Wrong Decisions
When buying securities, it is important to time the market as best as possible.
This might involve holding on to your stocks for some time to maximize profits.
However, when using a credit card, there is artificial pressure to close the trade quickly.
This is because the high-interest charges always hang over the trader’s head.
Credit cards offer, at best, a 30 to 45 day repayment period.
Sometimes, this may not be long enough to fructify the investment opportunity which you bought into.
In the end, this unnecessary pressure may lead to poor choices and hurried closures of positions, causing losses.
There is one more problem that affects investing with credit card money.
Since the amount needs to be repaid quickly, only short-term trades are possible.
Hence the capital gains tax levied is also higher.
Does Buying Stocks With a Credit Card Affect Your Credit Score?
Yes, as explained earlier, there are several ways in which using a credit card for investing can impact your credit scores.
Firstly, it would create a large credit card bill that might not be paid back quickly.
There is a 35% allocation to credit utilization in the FICO score.
This ratio can increase significantly if large charges are kept even after the due date.
Moreover, if you plan on taking a new card to fund your purchases, that will bring down the credit age.
It would also cause a hard check and a temporary drop in the report immediately.
Fees You Might Face When Buying Stocks With a Credit Card
While the cash advance APR seems to be the most obvious pitfall of credit card-based investing, there are other things to remember.
Let’s go through some of these.
Investment Fees
For those brokerages that allow this method of payment, there are investment fees involved, which could be as high as up to 5% of the total amount.
Transfer Fees & APR
A balance transfer fee might be applicable when transferring funds to your bank account from your credit card account.
This can be anywhere between 3% to 5% of the total sum.
Moreover, a balance transfer facility often shortens the repayment period to immediate.
Interest on the money would start getting charged the very next day.
Hence, there is a double whammy of penalties.
Instead, in such cases, it might be better to opt for a card with a promotional 0% APR for a few months instead.
Cash Advance Fees
A cash advance is another way money from a credit card moves into a checking account.
As one might expect, there is a fee involved in the process.
Much like balance transfers, issuers also want immediate repayment in this situation.
In fact, most credit card contracts stipulate a higher APR for cash advances.
This is another charge that traders should watch out for.
Best Ways to Invest Using a Credit Card
While it may not be prudent to use a credit card for investing directly, there are alternate ways to do so.
Here are some ideas on how this can be done.
Rewards-Based Investment Cards
In recent years, credit card rewards programs have taken on completely new dimensions.
No longer are frequent flyer miles and golf club memberships the only freebies being offered.
Cards like:
- Schwab Investor Card
- Fidelity Rewards Visa Signature Card
- and Citi Double Cash Card
have begun to deposit a percentage of your spending into a brokerage account.
This way, there is no risk of over-borrowing.
Whatever is earned becomes available for purchasing financial assets.
Use Cash Back Rewards For Investing
This is similar to the above idea, except that here the effort needs to be made by you.
Many credit cards offer cash-back rewards programs, where actual money is received in your bank.
A simple strategy would be to keep adding this sum into a brokerage account for investing.
Investment Apps
New-age investment apps are finding novel ways to help you buy stocks.
For example, some of them offer reward points on sites owned by them
When you pay via card at such places, a portion of the sale goes as a reward to the linked brokerage account.
Two examples of this kind are Acorns and Stash.
Gift Cards
Gift cards are equivalent to cash and can be used on certain brokerage accounts such as Stockpile for fractional share purchases.
You can buy them with a credit card and spend them this way, buying shares.
However, it would involve a cash advance fee and credit card charges.
Due to this reason, it may not be a great idea.
Balance Transfer
Another way to use a credit card is to take a cash advance or transfer balances from them into their bank.
Once the money reaches there, it can be linked to a trading account and used for investing.
Final Thoughts
Buying stocks with a credit card is simply not a very good idea.
The risks involved are too significant, and if you include the potential fees and charges to be paid, the returns may be significantly reduced.
Apart from this, the proverbial Damocles sword of high APR hanging over the trader’s head can cause bad decisions and major tax implications.
The whole thing might end up causing losses rather than any significant profits.
Again, this method of financing share purchases is anyway disallowed at most reputed trading houses.
The workarounds that we suggested have their limitations and often incur additional fees.
All-in-all, it would be simplest and safest only to use direct methods of financing purchases in the stock markets.
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