Should You Use your Credit Card to Buy Investments?

FIRE (Financial Independence, Retire Early) implies that the FIREd person is focusing on building new worth, saving money like there is no tomorrow, investing like crazy, and living frugaly to achieve a financial goal that takes some people 40 years in only 30 or 20.  This gives opportunity for creative investments to plague our minds.   Investors (as well as people that have no business in investing, yet!) are using credit cards and rent money to buy into Bitcoin, leveraged ETF’s and the next IPO.  This is a dangerous proposition created by FOMO, the Fear Of Missing Out.  The Securities and exchange comission has this Investor Alert regarding using credit cards to invest.

Investor Alert: Credit Cards and Investments – A Risky Combination

For some, credit cards can be a convenient way to purchase goods and services.  However, investors should understand that most licensed and registered investment firms do not allow their customers to use credit cards to buy investments or to fund an investment account.  We urge investors to work only with a licensed or registered investment professional or firm and not attempt to use a credit card to fund investments.

Investing using a credit card has several risks:

• Fraud.  Unregistered and unlicensed sellers often pressure investors to use credit cards for investments that are actually fraudulent scams.  Most registered investment firms do not allow their customers to use credit cards to purchase investments – so be skeptical if you are asked to use a credit card to invest.  Carefully research the background of any investment professional or firm before handing over your money.  Use the free, simple search tool on Investor.gov to make sure the firm and professional is licensed.

• High Interest Rates.  High interest rates may significantly reduce the return you receive on any investment or may even cause you to lose more money than you invested.  For example, if your credit card charges a 15% interest rate and your investment provides a 10% return, you will owe more money than you made on your investment if you do not pay off your credit card balance before any interest accrues.  This is why we urge investors to consider paying off credit card debt before making an investment decision.

• Credit Risk.  If you cannot make your credit card’s minimum payments, you may incur additional credit card fees and risk damage to your credit score.

• Transaction Fees.  Credit card companies generally charge a processing fee (often ranging from 1.5% to 3%) for each credit card transaction.  If you use a credit card to buy an investment, you generally have to pay this processing fee with each investment purchase which would have a major impact on the investment’s return.

Some other things to consider include:

• Issues with Withdrawals.  Credit card investment scammers often use delay tactics when you attempt to withdraw your money from the fraudulent investment.  These scammers will often hold up your withdrawal request from an investment account until it is too late for you to dispute the charge(s) with your credit card company.  The Fair Credit Billing Act (FCBA) provides consumer protections if you are charged for goods and services you didn’t accept or that weren’t delivered as agreed, but you must send a letter disputing the charges that reaches the creditor within 60 days after the first bill with the error was mailed to you.

• Credit Card Abuse.  Keep an eye out for unauthorized charges on your credit card statements.  Even if you signed a form purportedly waiving your right to dispute any credit card charges, report all unauthorized charges to your credit card company immediately.

• Third-Party Payment Processors.  If you make an investment using your credit card through a third-party wallet service or payment processor, you may have limited recovery options because these entities may be unregulated or operating unlawfully.

• Margin Accounts.  A margin account is an investment account offered by some investment firms which allows you to borrow cash from the investment firm to buy securities, using the account as collateral.  While both involve borrowing money to buy investments, using a margin account is not the same as using a credit card to buy securities.   For additional information on how margin accounts work and their related rules and regulations, please read our Investor Bulletin: Understanding Margin Accounts.