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Buying stocks is a risky game, but some ways to finance your stock purchases are less risky than others. You can invest using a credit card, but as our mothers once told us, “just because you can do something doesn’t mean you have to”.
Buying stocks with a credit card can add risk to an already risky transaction, but the credit card rewards can be worth it. Be sure to do your research and consider the risk-reward proposition before committing financially.
How to use my credit card to buy stocks
Naturally, brokerage firms prefer that you fund your brokerage account by wire transfer or check. These methods are often simpler and safer for the investor. If you decide it’s worth buying stocks with your credit card, you’ll likely need to route your money indirectly to your brokerage account.
With the Stockpile app, you can buy fractional shares using gift cards, ranging in value from $1 to $2,000. You can buy a Stockpile gift card with credit and then redeem the value of the card to buy stock. Stockpile allows a maximum purchase of $1,000 per day and $2,000 per year with a credit card. Again, be sure to calculate beforehand what your actual gain will be after fees incurred. Whatever amount you pay for the gift card, you will owe it to your credit card balance and you will also have to pay the additional investment and trading fees through the app.
If you decide to use your credit card to make a balance transfer or cash advance from your credit card account to your checking account, then you can invest directly from your check into a brokerage account. Keep in mind that since balance transfers and credit card cash advances aren’t considered purchases, these charges likely won’t earn points redeemable under your card’s rewards program. Fees will be higher and interest will start accruing immediately unless you are using a 0% APR offer. We can’t stress enough our dislike of the idea of using a cash advance or balance transfer to buy stock and our recommendation that you read your cardholder agreement to see if it’s allowed if you insist on it. ‘to try.
Rewards can be a motivator for trying to buy stocks with a credit card, but it’s actually quite rare to be able to achieve this.
Most credit cards don’t allow you to earn rewards on cash equivalent purchases, which can include gift card purchases, so chances are your credit card won’t allow you to do this. If your card allows it, the most likely way to earn rewards on card purchases is to purchase gift cards through Stockpile or another app that offers the same service. Again, check the fees incurred by the app, brokerage or credit card and do the math to find out if you are actually a winner.
Cards that offer welcome bonuses for spending when opening an account may offer more profitable reward options, but if you decide to seek out a new credit card with better rewards with the aim of purchasing actions with it, keep in mind that each time you apply for a new card, the bank will do a thorough investigation of your credit, which may cost a few credit points.
Things to consider before buying stocks with a credit card
Before buying stocks with a credit card, be aware of the fees that accrue. These can include investment fees, cash advance fees, late payment fees and variable interest rates if you have trouble paying off your card balance each month – and in some case, this list may only scratch the surface.
Be sure to check the fees and understand the cost of using a credit card and the cost of transactions with any app or site you choose to use.
Transfer fees and interest
Your credit card may allow you to transfer funds to your bank account, where you can spend them however you see fit, including stocks. Depending on your card company and cardholder agreement, balance transfer fees can range from 3% to 5% or more. Balance transfers may earn interest from the same day a transfer is made, so you should pay close attention to the terms of your cardholder agreement.
If you plan to do this, it’s probably best to use a 0% introductory APR on the balance transfer offer to avoid interest during the introductory period, but make sure you have a plan. to pay off the balance before the end of the APR introductory period or you will be required to pay interest at the end of the period. Balance transfers are generally designed and intended to transfer balance from one credit card to another, so your cardholder agreement may also prohibit the use of a balance transfer in this manner. We don’t recommend using a balance transfer to accomplish this in most circumstances.
Cash advance fees
You can request a cash advance on your credit card to access the funds, but this will also incur a fee between 3% and 5% of the requested amount. Cash advances also normally earn interest immediately and on most credit cards the APR tends to be even higher than standard purchases and balance transfers. Although this is a quick way to get money, this method can add immediate and increasing pressure on your finances. We do not recommend using a cash advance to access funds as a means of purchasing stock.
Beware of scams
If you’re being solicited or encouraged to buy specific stocks with your credit card, it’s probably a scam. It should never be necessary to buy stocks with a credit card. If you are told otherwise, you should definitely do your research before making any purchases or providing any personal information.
How does this affect my credit score?
Whether you’re applying for a new card to make a stock purchase or using an existing card with high reward potential, pay close attention to your credit score. Every time a credit check is done, a thorough investigation can affect your credit score, so it’s best not to do it too often. With a large stock purchase, extended cash advances, or balance transfers, be sure not to bring the card’s outstanding balance too close to its pre-set credit limit, as this may increase your utilization rate credit and lower your credit score.
Opening too many accounts at once or applying for too many cards too quickly can also negatively impact your credit. In addition to affecting your credit history numbers, activity like this can potentially set off red flags with your card issuer. If they see you making risky spending choices, a card issuer may limit your ability to access more credit or receive approval for new cards.
Does buying stock with a credit card affect my taxes?
Yes. Whichever method you choose to buy or sell stocks, your investments may be subject to capital gains tax when you make money.
Capital gains taxes are determined by the length of your holding period for a given asset. This is something to be wary of if you are essentially using a loan from your credit card company to invest for the long term with a high initial buy-in. The IRS considers long-term holding periods to be at least one year, which means that if you invest a large sum over a long period of time, you should consider the ultimate gain you make. Not only will you want to find the funds to pay off your monthly card balance long before you intend to sell, but you may also have to pay taxes due on your gain.
Investing in the stock market involves inherent risks, particularly during periods of market volatility. It is highly preferable to work directly with a brokerage firm and only risk the money you already have when trading stocks. If you’re looking for credit card rewards, be aware that most credit cards are unlikely to reward transactions you might make by buying stocks with a credit card. If the market slows, the rewards you’ve earned and your investment may be lost and you’re still stuck with your credit card bill. If you want to use a credit card to invest, there are relatively safe ways to move the money around, but you need to be careful not to spend money you don’t have, keep an eye on fees, and the interest you incur and make sure you don’t damage your credit in the process.