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Using a credit card to invest
You’ll typically ask two questions: Can I do it — and should I?
Most investment platforms won’t accept credit cards as a payment method. But if you really want to use plastic, you have a few roundabout ways to try.
Before investing with a credit card, understand that it can be highly risky and many experts warn against it. It’s easy to get in over one’s head due to high credit card APRs, and any interest you may pay on your card balance can easily wipe out your earnings from investment gains.
How to use a credit card to invest
As we’ve discussed, investing with a credit card can be risky. But if you’re raring to go, here are a few ways to do it.
- Take out a cash advance.
Once you take out your cash advance, funnel it into your brokerage. For example, you could deposit cash into your bank account, which you’ll link to your trading account. You may also be able to deposit directly into your trading account with a cash advance check.
There are big downsides to this method, however: Cash advances typically come with fees and higher interest rates. Also, they often start accruing interest immediately.
- Leverage PayPal.
Another strategy — of dubious validity under PayPal terms — is to create two PayPal accounts. Then link one account to your credit card and the other to your bank account. Once done, send money to yourself from the credit card-linked account to the bank-linked account.
You may be able to fund your brokerage account directly through PayPal. If not, you can withdraw your PayPal funds to your bank account, which you’ll link to your brokerage.
- Sign up for Acorns.
With the Acorns app, you can make microinvestments in exchange traded funds (ETF). The app allows you to link your credit card. Note, however, that funds for Round-Ups are drawn from your linked checking account, so you’re not actually using the credit from your card.
- Use a 0% APR balance transfer card.
With a balance transfer, you move debt from other sources onto your credit card. You can take advantage of this by acquiring money through credit and then moving your debt to a balance transfer card. For example, you can use the PayPal strategy we discuss above and then use a balance transfer to move your debt to a 0% APR card.
On the downside, each balance transfer you make typically comes with a fee of 3% to 5%.
- Buy commodities.
If you have a good eye for valuable commodities, you can use your credit card for items like baseball cards and jewelry. Note that if you want to pay off your card balance with earnings from the sale of your commodities, you’ll need to be relatively certain your purchases will appreciate within a short period of time.
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Capital One® Quicksilver® Cash Rewards Credit CardRead more
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Can you buy stocks with a credit card?
Most brokers and online trading platforms won’t let you buy stocks with a credit card. Some platforms will let you buy discount stocks or fractional shares with your card — but do your research and remember it’s risky to invest with credit.
Should you use a credit card to invest?
It’s tempting to use a credit card to purchase investments. You can extract money from your card, then take advantage of the grace period from any accrued interest. Meanwhile, you can invest that money and hopefully start collecting a return on your investment before the interest kicks in.
That sounds great in theory, but in practice, it rarely pans out. Credit card APRs are generally between 15% and 20% — that’s a high price to pay to borrow money.
There’s more bad news: The average annual return for the S&P 500 is 10%. If you adjust for inflation, that figure drops to 7%. When you’re paying 15% APR to borrow money via credit card but only making a 7% return on your investments, you lose on the math.
There are alternatives to using a credit card to invest that can still boost your investment account. For example, with the TD Ameritrade Client Rewards Card, brokerage clients get an additional 10% value on points redeemed into their Ameritrade accounts.
What about 0% APR cards?
Let’s say you have a card that offers 0% APR for 12 months. Should you take out money from the card to invest?
You certainly have more time for your investments to work out. But according to many experts, you’re still playing a risky game. If you take out a lot of money but your investments don’t appreciate within 12 months, you’ll be hard-pressed to pay back the money you’ve borrowed.
Worse, after 12 months your cushy 0% APR has expired — and it’s probably replaced by a high APR. So while you’re under pressure to pay off your balance, your debt is accumulating interest at a high clip.
As always, your investment decisions are up to you. But many experts recommend investing with money you already have. And if you’re going to borrow money to invest, do your research and know what you’re doing.
Instead of using a credit card to invest …
If you want to invest on credit, consider opening a margin account instead. These accounts let you borrow money to purchase investments. For example, you might pay for half of an investment, then borrow the remaining funds from your broker.
What is credit card arbitrage?
Credit card arbitrage is borrowing funds from your credit card at a certain interest rate and investing the money into a higher-rate investment, profiting off of the difference.
Usually, this involves leveraging a card with a 0% purchase or balance transfer APR. As a simple example, you might invest in certain stocks with a 0% purchase APR card. Before your introductory rate ends, you’ll sell your stocks, pay off what you owe on your card and collect whatever’s left.
Be cautious when using credit card arbitrage. The reward might not be worth the risk, especially considering federal and state taxes.
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