There are many ways that people can invest in stocks, yet one little known method is using your credit card. This is because most brokers typically won’t allow you to buy stocks using credit. However, there are different ways to work around those limits. At the same time, doing this is not without risk.
Credit card holders always have the option of getting a cash advance. This doesn’t mean unlimited access to cash. The amount of money that you can withdraw from your credit account will depend on your credit limit and your credit provider’s specific terms for cash advances. This is the simplest and one of the fastest ways to use your credit card in order to purchase stocks. It’s typically easy to get a cash advance, and even easier to take that cash and put it into a brokerage account. Using cash advances may also allow you to hop onto certain investments at the perfect time, potentially resulting in big profits.
Con: Cash Advances Come With High Fees and Interest Rates
“Some come with high cash advance fees, which end up costing you more than a purchase or withdrawal would have with your debit card,” explains ScoreShuttle’s customer retention manager Jun Lee. This is why credit card providers make it easy for users to get cash advances. It’s one of the ways credit companies make money. As such, it’s actually very risky to use your credit card for your brokerage account. If your expectations about the movements of certain stocks turn out to be incorrect, you will end up owing a lot more to your credit provider than you initially planned. Stock trading in itself is already mired in risks – using a line of credit to pay for it adds another layer of risk to factor into your calculations.
Pro: Credit Cards With Built-In Investment Options
Just as there are credit cards with rewards geared towards travel and discounts, so are there credit cards designed for people who want to use rewards to invest in stocks. These are the credit card accounts that are co-branded with brokerages, with which you have the option of having your rewards automatically funneled into predetermined investment accounts. This is typically a safe choice for using credit cards for investment, as rewards systems are automatic, and credit companies typically only co-brand cards with highly dependable stocks.
Con: Investment/Brokerage Credit Cards Offer Less Control And Access
As you can only choose from a limited number of stock options, using investment or brokerage credit cards puts investment decisions out of your control. Furthermore, The Balance notes how only those with good to excellent credit are eligible for such credit card deals. You might want to check your credit rating to see if you would be eligible in the first place. And if you are, the investments will be made by the credit company on your behalf.
What’s the Alternative?
There are other ways to buy or pay for stocks that don’t involve massive interest fees and other risks, such as using a debit card, that are a more commonly accepted payment method by brokers. Petal Card states how debit cards deduct money directly from your checking account to pay for the purchase. In this way, a debit card ensures that you’re only spending what you need plus any fees involved with transferring the money to your brokerage account. By doing this, it can allow you to avoid the fees and risks typically associated with using credit cards. At the same time, relying on just debit significantly lowers your capacity to buy stocks – but at much less financial risk to yourself. Before you make the decision to buy stocks with either credit or debit, make sure to carefully weigh the potential gains and consequences involved.
For more practical advice on stocks and other forms of trading, check out our feature on ‘Common Trading Mistakes’.