You can use your credit card to make an investment if you’re strapped for cash – but you probably shouldn’t. While it is possible to buy stocks with funds from a credit card loan or a credit card cash advance, it is almost impossible to make a profit after fees, interest and Taxes.
How can credit cards be used to buy stocks?
You need cash to buy stocks because investment brokers often need funding from a bank account. Some brokers, such as Stockpile, accept cash from debit cards.
You have two options for withdrawing money from your credit card. Keep in mind that these moves come with interests and other drawbacks.
- Credit card loans. With a credit card loan, you can borrow up to your card’s credit limit and get a cash deposit in your account. You will repay the loan in installments at an agreed-upon interest rate, usually lower than the annual percentage rate on your card, but potentially higher than personal loan rates.
- Cash advance. A cash advance allows you to withdraw money from your credit card using an ATM, bank withdrawal, or convenience check. Cash advances usually have a fee, a higher APR than your card’s purchase APR, and no grace period, so interest charges start accruing as soon as you withdraw the money.
Does Buying Stocks with a Credit Card Affect Your Credit Score?
Credit scoring systems don’t know what you charge on your credit cards, but they do know how much of your line of credit you are using and whether you are paying your bill on time and in full. Your credit card balance and use of credit whether you’ve taken a shopping spree or taken out a cash advance or credit card loan to invest.
Using too much of your credit limit can hurt your credit score. “The higher your balance, the closer you get to your limit and the higher your usage rate will be,” says credit expert John Ulzheimer, who previously worked for Equifax and FICO. “It’s not a good thing for the scores.”
Are you planning a larger financial move, such as buying a house or a car? Having a large balance for whatever reason can hurt your chances of getting approved for a loan. “If you’re considering applying for a loan, you’ll want that balance paid off very low, especially if it uses up a large portion of your line of credit,” says Jeff Richardson, senior vice president of marketing and communications at VantageScore. Solutions.
If you’re hoping to pay off your balance quickly with investment gains, you might not be worried about your credit rating going down in the short term. But if the gains don’t materialize quickly enough that you can pay off the balance – and they probably won’t – a downgrade in your credit rating in the short term could turn into the long term.
What are the risks of buying stocks with a credit card?
There are risks involved in investing, but your exposure increases when you buy stocks on credit. Even if you lose money on your investment, your credit card company will still expect payment for the money you borrowed.
Consider these complications before using your line of credit to buy stocks:
- You could borrow money that you cannot pay back. If you expect money to produce investments, you might be tempted to borrow more than you can pay off in a reasonable amount of time, leaving you stuck with a high credit card balance.
- Your returns may not exceed fees and interest. Borrowing money with your credit card isn’t free. You will pay interest if you take out a credit card loan or cash advance. Suppose you have a cash advance APR of around 25% with a 5% advance charge. “This means that if you bought $ 10,000 of stock with a credit card and paid off the balance of $ 10,000 in two months, you’ll have to shell out around $ 900 in fees and interest,” says Stephen Au, senior contributor at credit card resource content. Improved points. To get back into the green, you’ll need stock returns that are greater than the interest and fees for your cash advance, which is unlikely given that the average stock return is around 10% each year and that number can vary. considerably.
- You can pay taxes on the winnings. You don’t make any money until you sell the stock, which you might be tempted to do quickly to lock in any gain over your APR. But if you sell stocks with a profit within a year of buying, you will be taxed on the gains at your regular income tax rate, rather than the likely lower tax rate on gains. in capital.
Should you buy stocks with a credit card?
The answer is almost always no. Investing with borrowed money is risky business, and the odds are not on your side.
“There are very few scenarios where buying stocks with a credit card is a good idea,” says Au. “It almost always ends badly.”
Even if you see capital gains, they can be offset by interest, fees, and taxes.
“Ask yourself: are you an investor smart enough to make investments that will exceed the interest you will pay on the debt? Said Ulzheimer. “If your stock is up 10% this year and your APR is 25%, you’ve lost money even though your stock’s value has gone up.”
The likelihood that you’ll get a head start buying stocks with money from your credit card decreases more and more the more you factor in the risks, says Ulzheimer. “You really have to blow him off the ballpark.”
And if you don’t, your credit card bill will still be there.
What are the alternatives to investing with a credit card?
If you want to invest, there are many options besides using funds borrowed from a credit card. Anything that doesn’t charge you an interest rate is better, even if it means investing more slowly, says Richardson. “Use your cash. Do it over time, not just once. ”
Alternatives to using a credit card loan or cash advance to buy stocks include:
- Rewards by credit card. Redeem the cash back rewards on your checking account, then transfer the funds to your brokerage. Certain credit cards, such as the Visa Signature Fidelity Rewards card and the Schwab Investor Card from American Express, may deposit rewards directly into eligible investment accounts.
- Brokerage margin loans. Your brokerage may allow you to borrow money against current investments, and you can use those funds to buy additional stocks. Interest rates on margin loans are generally lower than interest rates on credit cards, but these loans are also risky. Your balance will expire whether or not your investments materialize
- Sponsored by employer or self-employed 401 (k). Saving for retirement may not seem so exciting, but it can pay off in the long run. If you use a traditional 401 (k), you will be using pre-tax money to invest, with tax deferred until you retire and withdraw funds.