Credit cards and investments
Stock brokers have made it easy for people to invest borrowed money in shares and other financial assets by accepting credit cards as a funding source. While you might think it’s a great idea to use your credit card to buy investments, you should take a step back and really think hard about adding debt to your finances to buy an investment before rushing in.
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First of all, you need to consider what type of investments you will be buying and what the return is. If the yield on your investments is lower than the interest rate you are paying on the money you borrowed, then you might want to consider a different funding source.
Likewise, if your goal is to trade shares in the short-term, you have to be realistic about the gains you will have and compare them to the interest charges you are accruing on your credit card. If you can only average an annual revenue of 8% on your investments but are paying 16% in interest costs per year on the capital you invested, then it might be time to reassess.
Credit cards, investments and fees
When you use your credit card to purchase something in a shop, that merchant is charged a fee by the card issuer to process the transaction. This fee is between 1% and 2% and you never actually see it because the merchant handles it. However, when it comes to stock brokers, their profit margins are so low that they can’t afford to cover this fee themselves and, implicitly, they pass it on to the consumer.
Note that you won’t be charged this fee every time you buy or sell investments, but only when you fund your account through credit cards.
Some stock brokers give you the option to pay the money into a cash account that is essentially a savings account held by the stock broker. In this case, you probably won’t be charged a credit card transaction fee but there is another problem. Once you make the payment into the cash account, it is usually considered a cash advance and the result is that you will start accruing interest the moment the payment is made and, more often than not, the interest rate is much higher on cash advances.
Credit cards, investments and risk
There is an inherent risk with any investments but even more so when you are borrowing money to do it. This is because when you are buying investments, you will find that you can use leverage to buy more shares, even if you don’t have the cash to cover it all. This can mean a higher profit because of a larger number of shares but it can also lead to you losing more money faster.
Using credit cards to buy investments is not always the wisest course of action, especially if you aren’t going to be paying your bill off in full at the end of the month. Therefore, if you want to use a credit card to finance an investment, the only way to do it without exposing yourself to even greater losses is to make sure that you cover the cash you borrowed for investment purposes as soon as possible.Back to top