Buying stock with a credit card: Is it a good idea?

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Every investor must balance risk versus reward, but attempting to buy stocks with a credit card can quickly turn the odds against you.

If you have some disposable income right now, you may be considering putting those funds into the stock market to grow. However, using a credit card to do so could put you at risk for fraud, hurt your credit and end up costing you more than you could earn in returns. Most reputable firms won’t even allow it, and taking the risk could have some unpleasant consequences.

Risks of buying stocks with a credit card

Buying stocks comes with the inherent risk of losing your investment. It can be disappointing when your own money is lost, but the consequences of losing money on borrowed funds, such as your credit limit, can be even greater.

Borrowing money you cannot repay

When you invest in stock, you are taking a calculated risk. If you’re unable to afford the amount you invest today, chances are you’ll rack up much more in high interest on your balance than you stand to gain with your stock investment. And if you lose money with your investment, you may face more money owed in credit card fees on the balance, due to late or missed payments, and take a credit score hit.

Today, average credit card interest is above 16 percent, while average stock market returns vary but are generally considered around 7 to 10 percent — and that’s for long term, less volatile investments. Borrowing money to invest in the stock market can cost you more in interest than any returns you may see; if you want to start investing in stocks, only put in as much as you can afford today and assess all the risks beforehand.

Fraud risks

According to the Securities and Exchange Commission, most reputable firms don’t allow the use of credit cards to invest. Sellers who pressure you into using credit cards are more likely to use your money for fraudulent scams, and anyone asking you to immediately invest large sums of money likely does not have your best interests in mind.

If you choose to go ahead with using your credit card to invest, keep an eye on your credit account for any questionable transactions. If you notice anything suspicious, report it to your card issuer immediately.

Safer ways to invest using a credit card

Buying stocks with your credit card is risky business, but that doesn’t mean you can’t use your credit card to help you get returns on the market. There are safer ways to do this which don’t involve directly buying stocks. Instead, you can leverage your credit card to grow funds.

Use an investment app

Investment apps such as Acorns and Stash are a great way to use your credit card to begin building your investment portfolio. For example, Acorns allows you to link your credit card to a round-up program for each purchase you make and offers a “found money” feature that earns money when you shop with an Acorns partner. There are a variety of similar investment apps that you can use with ease from your phone to help grow your money securely.

Open a credit card that invests rewards

While many rewards cards earn cash back, points or miles you can use towards future purchases, some credit cards offer the option to deposit rewards into an investment account. For instance, the Fidelity® Rewards Visa Signature® Card offers a competitive two percent cash back on all purchases, which is deposited into a qualifying Fidelity account.

Invest your cashback rewards

If you already have a cash back rewards card, you can request your cash back in the form of a check or a deposit. Your issuer may require you to reach a minimum amount, such as $25, before you can receive a check or deposit, which you can then use to fund your own investments. Consider setting up a brokerage account with low fees and no minimum deposit that you can add to as you earn.

Bottom line

When stock prices are low, it’s a great time to make investments. However, it’s important to do so responsibly. While it may be tempting to buy stocks using your credit card, doing so is also very risky and could lead to fraud. It’s wiser to leverage your card in other ways to earn on your spending, such as using cash back rewards to invest or connecting your card to an investment app.