While nearly 80% of U.S. consumers have credit cards and we make 20 billion credit card transactions each year (accounting for roughly 13% of the country’s Gross Domestic Product), there’s one thing that’s tough to do with plastic: purchase an investment.
Not only do Federal Regulations limit the extent to which you can make investments with borrowed money – which is technically what a credit line represents – but most brokers explicitly prohibit their customers from directly funding their accounts with credit cards. It makes sense, after all, since people would inevitably gamble with money they don’t have, rendering them unable to pay lenders back if investments don’t hit. Brokers also have their own mechanism for leveraged investing – margin accounts – that they wish to protect and promote. Credit card-based investing would represent unnecessary competition, especially since the brokers would have to foot the cost of credit card processing.
Nevertheless, there are indeed a number of ways that you can get creative and invest with your credit card. We certainly don’t condone doing so, for reasons we’ll flesh out in more detail below, but enough people ask about this issue that we thought it would be worth clarifying.
It’s not difficult to comprehend why someone would want to fund an investment with a credit card: doing so makes it possible to reap rewards far greater than the money in your bank account could provide. By that same token, the reasons to avoid such transactions – including those mentioned above – are no real mystery either. A few other factors to consider include:
- It’s Unnecessarily Risky: Debt-based funding drastically increases the pressure of making successful investment decisions, especially since it puts a clock on every bet that you make. The debt is going to come due eventually, and if the investment has not appreciated by then, you’ll be left profit-less and scrambling to come up with the funds necessary to pay back your lender. Failure to repay a credit card company can lead to expensive interest charges, delinquency and debilitating credit score damage.
- You’d Face an Uphill Battle to Profits: Credit cards have among the highest interest rates of any consumer lending product, currently averaging around 18%. So, if you’re running up a balance funding your investment, you’re going to need 18% in profits just to break even. That’s a very tall task considering the S&P 500 has historically averaged about 7% in annualized returns.
- Margin Accounts Have Lower Interest Rates: Margin accounts are far less expensive than even credit cards for excellent credit, which have an average APR of 12.87%, according to WalletHub's latest Credit Card Landscape Report. Vanguard, for example, applies a rate of 5.25% - 7.75%, depending on the size of your loan balance.
Despite the obvious hurdles preventing such transactions, it is possible to fund investments with a credit card, whether directly or as a result of some creative maneuvering. We’ll explain these methods in detail below.
- Leverage Loans & Lines of Credit: Most people don’t know it, but you can actually transfer most types of consumer debt to a credit card – including personal loans and home equity lines of credit. That means you can use the cash from these lending vehicles to purchase your investment, and then turn around and transfer the resulting debt to a credit card – preferably one with a 0% balance transfer APR and no transfer fee.
You won’t be penalized by interest so long as you pay off your complete credit card balance before regular rates take effect. A credit card calculator is very helpful in this regard. Keep in mind, however, that this increases the importance of achieving time-barred investment success.
- Use PayPal: PayPal allows you to send money to other accounts via credit card as well as deposit funds into a bank account or request a check for the amount of your balance. You could therefore use different e-mail addresses to create two PayPal accounts – one linked to your credit card and another to your bank account – and thereby turn credit into investable cash without having to pay the extremely high interest rates associated with cash advances.
You just need to make sure the investment you’re financing brings a return above 3% because PayPal charges 2.9% of the amount being transferred, plus $0.30 when you use a credit card. In order to maximize the effectiveness of this strategy, you’ll also need a credit card that offers 0% on purchases for an extended period of time so as to prevent interest from accruing until you have time to pay off your balance.
- Access Checks: Credit card companies often mail customers blank checks if their accounts have been idle for an extended period of time. The thinking is that while you might have decided plastic is of little use to you, a check might help facilitate certain monthly payments and get you using your account once again. You could, of course, use one of these checks to purchase an investment, but whether or not it would be wise to do so depends on the interest rate and fees that apply.
Use this method if you can get a 0% interest rate without incurring any fees, but you should definitely avoid doing so if your check will be considered a cash advance. Credit card companies charge a cash advance fee that is usually around $11 and begin to assess interest rates typically in excess of 22% immediately upon such a transaction being completed. It is extremely difficult to profit from an investment with such forces working against you.
- Purchase a Commodity: Investments need not be in the form of a stock or bond. Things like jewelry, collectibles (e.g. stamps or baseball cards) or artwork may also qualify. And since you may be able to purchase such items directly with plastic, this would certainly qualify as investing with a credit card.
- Use Acorns: Acorns is an investing app that can be linked to a credit card, debit card or checking account. It gives you the option of rounding the amount of every purchase you make up to the nearest dollar and putting this “spare change” into an ETF that matches your appetite for risk. For example, if you buy a cup of coffee for $3.50, the app will give you the option of treating the transaction like it was for $4 and investing the spare $0.50. Acorns charges a $1 monthly fee when you have an investment balance, plus 0.25% - 0.50% of your balance over the course of a year.
While none of the country’s largest stock brokerage firms will accept deposits from a credit card directly, there are a number of other funding methods at your disposal, in addition to the indirect credit card investing tactics explained above. Your broker may also give you the option of investing borrowed funds in what’s known as a margin account. You can get a sense of how these accounts work as well as each broker’s approved methods of funding in the table below.
|Brokerage||Credit Card Policy||Accepted Funding Methods||Margin Account Underwriting||Margin Account APR|
|eTrade||Not Accepted||Bank Transfer, Money Order, Check, Account Transfer||Must maintain maintenance margin of 25% of total market value of stocks in account.||3.89% - 8.44%|
|Fidelity Investments||Not Accepted||Cash, Assets, Check, Direct Deposit||Applicants evaluated based on estimated net worth and estimated liquid net worth.||3.750% - 8.575%|
|Scottrade||Not Accepted||Electronic Transfer, External Account Transfer, Wire Fund Transfer, Stock Certificate Deposit, Check Deposit||Client is required to read and sign margin application agreement. No other underwriting requirements.||5.25% - 7.75%|
|TradeKing||Not Accepted||Wire Transfer, Check, Account Transfer, ACH||Applicants’ trading experience and overall financial are taken into account, and either cash or stock is required as collateral.||4.00% - 8.75%|
|Vanguard||Not Accepted||Check, ACH, Wire Transfer, Assets||Clients are required to complete a Margin Account Application. Their net worth, annual income and Vanguard account information are taken into account.||5.25% - 7.75%|
Investing with a credit card and investing on margin are essentially synonymous acts – both involve leveraging debt in the pursuit of outsized returns – that are treated entirely differently in a practical sense. For added insight into the differences between the two leverage techniques and the inherent risk involved with each, we turned to a panel of experts from the world of finance and investing. You can check out their affiliations, the questions we asked them, and their commentary below.
- Is it ever a good idea to invest on margin? If so, when?
- Why is investing on margin allowed, when investing directly with a credit card is not? Might that ever change?
- If someone wanted to indirectly pay for an investment with a credit card, how could they do so (e.g. through PayPal)?
Ask the Experts
Image: Fer Gregory/Shutterstock