Man making online purchase with credit card ©iStockphoto.com/MangoStar_Studio

Using Your Credit Card To Invest? Think Again.

When was the last time you used actual cash to pay for something? Reaching into my wallet these days, I am almost exclusively grabbing for a piece of plastic rather than a greenback.

I'm far from alone in this. Only about 24 percent of Americans reported making most purchases with cash, according to a 2016 Gallup survey. It's easy to see why. Credit cards are an efficient way to make purchases, and we have become accustomed to swiping or inserting a chip when it's time to check out.

Most licensed and registered
investment firms do not allow
their customers to invest
using a credit card.

But, there is one exchange where credit cards might not be your best bet: buying investments.

The Securities and Exchange Commission's Office of Investor Education and Advocacy (SEC) recently issued an investor alert listing some of the risks associated with using credit cards to buy investments or to fund an investment account.

The SEC reminds investors that most licensed and registered investment firms do not allow their customers to invest using a credit card, and urges investors not to attempt to use a credit card to fund their investments.

Here are five things to consider before using a credit card to invest.

  1. Pressure to use a credit card to invest might be a sign of a scam. The SEC alert warns that if someone is asking you to use a credit card to purchase a stock, bond, other interest in a company or other investment opportunity, be wary. This is a tactic used by some unregistered and unlicensed sellers to get your money, and it could be a scam. One way to protect your money is to make sure to only deal with licensed and registered professionals. Most registered firms prohibit customers from using credit cards for their investment accounts. How do you know if an investment firm is licensed and registered? Check using FINRA's BrokerCheck and the SEC's Investment Adviser Public Disclosure website.
  2. Don't forget about credit card interest rates and fees. The interest you pay on credit card purchases might significantly erode any return on your investment. Depending on how high your rate is, you might actually end up in the red even if your investment makes money. The SEC provides an example: say your investment provides a 10 percent return, but you pay a 15 percent interest rate on your credit card purchases. In this scenario, you will owe more money than you made on your investment, assuming you don't pay off your credit card balance before any interest accrues. Isn't the point of investing to help build assets, not add to our debt? Credit card companies also generally charge a processing fee (often ranging from 1.5 to 3 percent) for each credit card transaction, which can also impact your investment return if you are charged with that fee.
  3. You add more risk to your investment. All investment products carry some form of risk. When you invest with a credit card, you add credit risk to the mix. If you cannot make your credit card's minimum payments, you might have to take on more debt by racking up additional fees and charges. You also might 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.
  4. Check your statements for unauthorized charges. If your card information gets into the wrong hands, you will want to know about any charges you don't recognize as soon as possible, so you can report them to the credit card company. In most cases, credit card companies will work with you to address the unauthorized charges, but the sooner you report the better. The SEC also cautions that investments made using your credit card through a third-party wallet service or payment processor might mean limited recovery options. While some better known payment processors, like Square or PayPal, are licensed as money transmitters, other entities may be unregulated or operating unlawfully. The U.S. Treasury Department has a search tool for Money Services Businesses, or check the service by contacting your state banking regulator.
  5. Look out for delays in withdrawal payments from your investment account. The SEC alert states that some scammers often use delay tactics when you attempt to withdraw your money from a fraudulent investment. In fact, sometimes they hold up your withdrawal request until it is too late for you to dispute the charge with your credit card company. The alert references the Fair Credit Billing Act (FCBA), which provides consumer protections if you are charged for goods and services you didn't accept or that weren't delivered as agreed. To take advantage of these protections, you must send a letter disputing the charges that reaches the creditor within 60 days after the first bill with the error was mailed to you.

If you're suspicious about an investment offer that requires using your credit card or if you think the claims might be exaggerated or misleading, please contact FINRA or the SEC.

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