Can You Buy Stocks With a Credit Card?

So you want to start investing in your future, but you have very little extra cash and wonder if buying stocks with a credit card is a good idea. Well, first consider the fact that if you need to borrow money to buy stocks, it might mean you’re probably not in an ideal position to be investing in the first place.

This might be a good time to evaluate your spending and overall financial goals. Maybe you can start packing your lunch for work or bringing your own coffee. A few dollars saved here and there can easily be put toward your investment goals. Read on to learn more about how to start investing right away and responsible ways to leverage your credit card use to save or invest in your future.

The short answer is, technically, you can’t really buy stocks using a credit card. Brokerage firms want you to deposit money in your brokerage account in other ways, such as via check, bank transfer, or wire transfer.

Having said that, there are a couple of ways to get cash from your credit card and deposit that money into your brokerage account. This strategy is perfectly legal, but it also comes with fees and interest charges that can start you out in the red before you’ve even begun investing.

It’s easy enough to go to your bank or any ATM and get a cash advance from your credit card. You can then deposit that money in your investment account and use those funds to buy stocks. However, most financial advisors would not recommend getting a credit card cash advance unless it’s some type of emergency.

The reason for that is you’re ultimately going to pay more for that money than if you came into it by almost any other means. For one thing, there will probably be hefty cash advance fees (a flat fee or a percentage of the transaction, whichever is more). The average fee for a cash advance is between 3% and 5%. Check with your card issuer to see what fees they charge.

Even if there isn’t a cash advance fee, you will still have to pay interest on that transaction. Plus, most card issuers charge a cash advance APR (annual percentage rate) that is much higher than the rate you would pay for regular purchases — you could be looking at an interest rate of up to 25%. Keep in mind there is typically no grace period for cash advances, so you will start to accrue interest immediately.

Furthermore, if your investment doesn’t show a significant return quickly enough, you may find yourself scrambling to pay that debt down so you don’t pay a fortune in interest fees. And if your investment tanks and you lose the money altogether, you still have to pay off that credit card balance. Those are significant drawbacks. If you are set on financing the purchase of stocks, you may want to consider taking out a personal loan.

To get around the interest, you could apply for a credit card account with a 0% introductory rate for a set period of time — usually, a year, give or take. However, the introductory offer doesn’t usually apply to cash advances, and even if it does you’re still going to need that investment to pay off big-time before the introductory period is up. Otherwise, you’ll find yourself stuck with a high credit card balance that’s now accruing interest.

Another option to get money from your card is to open an account with a credit card company that allows you to borrow money from your credit card and deposit it directly into your checking account. Sometimes these balance transfer loans can come with a lower interest rate than regular purchases, but it’ll probably still be higher than the rate you’d get for a personal loan.

The issues that arise with this method are similar to getting cash advances: you are accruing interest along with a possible balance transfer fee in order to finance your stock purchases.

It can be difficult to make enough money on your investments to justify the costs of high credit card interest rates and fees. This is why most reputable brokerage companies would recommend that you only invest what you can afford to lose.

Investing is essentially a fancier, albeit more calculated, form of gambling, which means it’s a risky business. Buying stocks with a credit card ups those risks even further.

You could also use your credit card to buy gift cards designed specifically for purchasing stocks. The logic behind this option is that you can start young or new investors on the path to investing by giving them the gift of stocks, which could be a great present. Plus, it’s easy enough to make yourself the recipient of that “gift.”

Still, you are going to run into the same problems stated above. You’re still technically using a credit card for purchasing stocks, which means you’re running up your credit card bill while accruing interest.

Additionally, if you’re using a cashback rewards card (more on that later), you often won’t earn rewards for purchases that are considered equivalent to cash, like gift cards.

While using your credit cards for any reason — normal purchases, cash advances, or balance transfers — will not impact your credit, per se, the amount of money you borrow in relation to your credit limit will have an effect on your credit rating.

For instance, credit card companies and other creditors will look at your overall credit utilization ratio to determine if you are eligible for a loan or line of credit. More specifically, the traditional thinking is that you should be using no more than 30% of your available credit.

If you’re using much more than that, creditors may see that as a red flag that you might not be able to pay back your debts. If you’re using a lot more than that, your credit score will likely take a hit. This is true even if you’re in good standing with the credit card companies.

Another issue is if you are taking out new credit cards to buy stocks. Each time you apply, it results in a hard inquiry to your credit, which will cause a temporary drop in your score. If you do this too often, the credit card effect multiplies, further hurting your credit rating.

Having said that, if you pay down your balances, your credit score should recover pretty quickly. The question you need to ask yourself, though, is if you really want to take on the additional risk of losing money on your investment while running up a large balance on your credit card that will likely accrue interest immediately.

One of the best ways to invest in the stock market is through an employer-sponsored retirement plan, such as a 401(k). However, if your job doesn’t provide a retirement program, there are smarter ways to leverage your cards to aid in your investment strategy without having to borrow money to make stock purchases.

One such strategy is taking advantage of credit card rewards. It’s pretty common now for a credit card issuer to offer rewards that you can use in multiple ways. Among the most popular are cashback rewards, which is money you accrue just by making your everyday purchases.

Many cards will even have promotional offers of extra points or double cash rewards as incentives. This is all money that could be put into your bank account and used to enhance your investment portfolio. Of course, you should check with the card issuer before applying to find out the details of these offers.

Some brokerages, such as Fidelity and Schwab, offer their own no-annual-fee cashback credit cards, with the added perk that you can have that money automatically added to your brokerage account.

Round-up apps are arguably one of the best ways to leverage your credit card accounts. You can start investing with very little money, such as buying fractional shares, and those investments will add up over time.

To use round-up apps to invest, start by connecting them to your credit cards and bank account. Then, every time you make a purchase, the app will round up the sale to the nearest dollar. So if, for example, you pick up lunch for $12.52, $0.48 will go into your investment account, allowing you to play the stock market with money you might have otherwise tossed into a change jar and forgotten about.

While we know that investing in our future is important, it can be daunting to decide how much to put aside each week, pay period, or month. These types of apps make it easy to start putting aside a little money to invest, and whenever you have some extra cash on hand, you can deposit that into your investment account too.

While you can kind of buy stocks with a credit card, it’s not a sound investment strategy. Keep in mind that you’re not only borrowing money at a (likely) high interest rate, but you will probably also pay a cash advance fee or a fee to transfer funds, plus any interest you accrue over time.

Ideally, you will want to be in a solid financial position before taking big investment risks (such as borrowing money from your credit card). Now is a great time to start paying down high-interest debt, bolstering your emergency fund (and/or setting aside small amounts of cash for investing purposes), and participating in a 401(k) retirement plan (if your employer offers one). Once your finances are stronger, you can think about investing more of your money in the stock market — you can easily do so from the comfort of your phone using these brokerage apps.