Using Credit Cards for Investing: Exercise Caution
Credit cards are widely used to purchase many types of goods and services, but investors should exercise caution when considering using credit cards in connection with investing in securities.
Most registered brokerage firms prohibit customers from directly purchasing securities using credit cards. However, some investors indirectly use credit cards to purchase securities—by taking cash advances and transferring those funds to their brokerage accounts, for example.
Although all securities investments carry some form of risk, using credit cards to fund these investments—directly or indirectly—comes with risks that are unique.
Assessing the Risks
Here are four risks associated with credit card use for investing:
1. Unregistered Firms and Professionals – If a firm accepts credit cards as direct payment for securities, that might be a red flag that the firm isn’t properly registered. Firms and individuals must be registered with FINRA to conduct securities business with the investing public. Working with investment professionals and firms that are registered and/or licensed adds a layer of protection for your securities investments. Check the background and experience of anyone trying to sell you an investment by using FINRA’s BrokerCheck tool and the SEC's Investment Adviser Public Disclosure website.
2. Possible Scams – Be wary of anyone encouraging the use of credit cards to purchase securities, which might be a scam tactic. Also, using your credit card to invest through a third-party wallet service or payment processor could limit your recovery options, especially if an entity is unregulated or operating unlawfully. Research money service businesses using the U.S. Treasury Department’s search tool or by contacting your state banking regulator.
If you’ve given your credit card information for an investment, monitor your statements for any unauthorized or suspicious charges so you can report them quickly to your credit card company. Under the Fair Credit Billing Act (FCBA), you have the right to dispute charges for goods and services you didn't accept or that weren't delivered as agreed. To dispute a charge, you must send a letter that reaches the creditor within 60 days after the first bill with the error was mailed to you.
Credit card investment scammers often use delay tactics when you attempt to withdraw your money from the fraudulent investment. These scammers might hold up your withdrawal request until it's too late for you to dispute the charge(s) with your credit card company.
3. High Interest and Fees – Unless you pay off your balance in full each month, the interest you pay by purchasing securities with credit cards is likely to exceed any potential gains on your investment. For example, if you’re paying 20 percent interest annually on a credit card balance accumulated by purchasing stocks, your investments would have to exceed this rate of return for you to net any gains. Most investments don’t provide annual returns greater than the average credit card interest rate.
Credit card companies also generally charge a processing fee (often ranging from 1.5 to 3 percent) for each credit card transaction, which can impact your investment return if your firm passes the charge on to you. And firms that accept credit card deposits might treat them as cash advances rather than purchases, often generating additional fees and higher interest rates from your credit card company.
4. Credit Risk – When you invest with a credit card, or take a cash advance from your credit card to fund an investment, you put your own credit at risk. If you can’t make your credit card's minimum payments, you might take on more debt by racking up additional fees and charges. This risk is magnified if your investment gains are less than your interest payments, potentially creating a cycle of debt that works against your long-term financial goals. Accumulating significant credit card debt can also damage your credit score, which could impact your ability to secure a loan, such as a mortgage, or lead to higher rates on your debt in the future.
If you're suspicious about a securities investment offer that requires using your credit card or if you think the claims might be exaggerated or misleading, you can file a complaint with FINRA.
