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There are a few ways that you can use a credit card to buy stocks. However, it can be difficult and may not be a good idea even if you're up for jumping through a few hoops. The additional fees you'll pay could start you out in the red. And, if you're being pressured to use a credit card, that's a warning sign that it's a scam.
How to Buy Stocks With a Credit Card
Most brokerage firms won't let you directly fund your account with a credit card to buy and sell stocks. Instead, you'll have to fund your account in other ways, like a bank transfer, check or wire transfer. There are some creative ways to indirectly use a credit card to buy stock, but the downsides can be tough to justify.
One way you can use a credit card to buy stocks is to purchase a gift card for Stockpile, an online brokerage that lets you buy fractional shares. Gift cards are sold in amounts ranging from $1 to $2,000 and can be redeemed for stocks just like cash. However, you'll pay a fee of $0.99 to $2.99, plus an additional 3% debit or credit card fee for each gift card.
Another option is to use a credit card that lets you transfer funds into your checking account. You can then transfer the money to a brokerage account where you can invest it. However, the credit card issuer may charge a balance transfer fee (often 3% or 5%), and the transferred balance will immediately start accruing interest unless the card has an intro 0% annual percentage rate (APR) offer on balance transfers.
You could also get a cash advance with your credit card—but that's likely an even worse option. Cash advance fees are also around 3% to 5% and cash advance balances start to accrue interest immediately. Generally, the cash advance APR is also higher than the card's standard rates for purchases and balance transfers.
How Does Buying Stocks With a Credit Card Affect Your Credit?
Using a credit card could potentially affect your credit scores in several ways, regardless of what you purchase or why you initiate a balance transfer or cash advance.
If you apply for a new credit card, the resulting hard inquiry may hurt your credit scores a little. The new account will also lower the average age of all your credit accounts, which could cause your scores to dip.
Whether you use a new or existing card, your credit card's balance can have a major impact on your scores. Your credit card utilization ratio is a comparison of your cards' credit limits and balances as they appear in your credit reports. A higher utilization is worse for your scores.
Therefore, if you have a high credit card balance due to a big stock purchase, your credit scores could drop as a result. However, your score could also quickly recover if and when you pay down the balance.
Is It a Good Idea to Buy Stocks With a Credit Card?
Using a credit card to buy stock generally isn't a good idea. Investing in stock requires taking on the risk of losing money. By buying stock with a credit card, you could wind up with a high-interest credit card balance and lose your investment.
Additionally, using a credit card can be a bad idea because:
- You may pay extra fees. You may have to pay fees to the brokerage, an intermediary or your credit card issuer to use your credit card.
- You might not earn rewards. If your credit card offers rewards, you generally won't get them for balance transfers. You also might not earn rewards when purchasing gift cards or for cash advances.
- You start with a loss. The goal of investing is to make money, but using a credit card can result in an immediate loss from the fees. As a result, you'll have to make money on the investment just to break even.
- There's added pressure to make a quick return. If you're using a credit card with a promotional APR offer, you'll feel added pressure to make money before the promotional period ends and a higher interest rate kicks in.
- It could be a scam. The U.S. Securities and Exchange Commission has published several warnings about fraudsters who pressure people into making "investments" with a credit card. They may steal the money along with your card account information.
In short, credit cards can offer rewards and purchase protections that make them a better option than debit cards in many cases. But buying stock isn't one of them.
Alternatives to Buying Stocks With a Credit Card
As an alternative, consider some other ways you can invest in stocks.
You'll need a brokerage account first. A tax-advantaged account, such as an employer's 401(k) plan or an individual retirement account (IRA), is often a good way to start. If you don't have access or want to use those, however, you can also open a regular brokerage account.
When you don't have a lot of money to invest, you may want to look for a brokerage that lets you buy fractional shares. Rather than having to save up and buy an entire share of a company's stock, you can specify the exact amount of money you want to invest and buy a fraction of a share.
If you want to borrow money to invest, the best option may be a margin account. These let you borrow money at a much lower rate than credit cards directly from the brokerage. However, there are many rules and regulations you'll want to learn about first, and it might not be a good idea for a new investor.
Additionally, some brokerages offer cash back credit cards. You can use these rewards cards to deposit the cash back directly into your investment account. The Fidelity® Rewards Visa Signature® Card and Schwab Investor Card® from American Express are two popular options that don't have annual fees.
Ultimately, though, the need to borrow funds to invest might mean that you're not financially prepared to start investing. If money is tight, it might be better to focus on reducing your expenses and setting aside cash funds you can use to make investments. Even if you think you might have found a surefire investment strategy, be very cautious of making rash decisions when it comes to borrowing money for investments.
Consider Your Big Financial Picture
Investing is an important part of many people's financial plans. But before taking a large risk, such as borrowing money to buy stock, make sure you have a solid foundation. For many, that means an established emergency fund, no high-interest debt, a good credit score and investments set aside for retirement.
All information about the Fidelity® Rewards Visa Signature® Card and Schwab Investor Card® from American Express has been collected independently by Experian and has not been reviewed or provided by the issuer of the card.