Can you Buy Mutual Fund Shares with a Credit Card?


Because it is safe to assume that a lot of experienced investors already know the answer to this question, I am going to write this article with the beginner to the intermediate investor in mind. Sometimes we just don’t have cash on hand to invest and a credit card might seem like a good option. So, can you buy mutual fund units with your credit card?

Due to regulatory reasons, you cannot invest in mutual funds with your credit card. Also, most funds do not accept credit cards whether you are purchasing your funds in person or online. Finally, using your credit card indirectly to invest in mutual funds is not a good idea and you could end up losing more money than you initially invest.

This is such a tricky subject to cover and I understand that a lot of people have no other option other than to use borrowed money to invest. I would advise against investing out of desperation and would say that you should save up if you want to invest and start buying mutual funds.

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Why You Cannot Buy Mutual Funds With A Credit Card

So, we have already discussed that you cannot buy mutual funds via a credit card and in this section, I want to dig a little bit deeper into why you cannot do this.

The main reason why you cannot buy mutual funds via your credit card is because of regulatory reasons. Now, we need to consider what reasons would governments have to prevent you from doing this.

The first reason is that governments cannot tax credit cards. If you could invest in mutual funds via your credit card, you could basically “game the system” by investing with money that you have not paid tax on.

The second reason why the government regulates this is to protect you. I know, that does sound weird. However, it is important to remember that the job of a government is to serve its citizens. Investing in mutual funds via a credit card is extremely risky as it could put you into a large amount of debt.

Can You Buy Mutual Funds Indirectly With A Credit Card?

Ok, so I need to be responsible and I genuinely have the best interest of my readers in mind. So, while I am going to tell you how you can invest in mutual funds with money from your credit card, I am also going to write a section about whether or not it is worth it and I highly recommend that you read that section.

I do not advise or encourage the investment of borrowed money. All it leads to is people owing money they can’t afford.

There are two main ways that allow you to invest in mutual funds via your credit card. Let’s take a look at those methods and then discuss them in a little bit more detail.

  • Withdraw cash from your credit card
  • Transfer money from your credit card to your cheque account.
  • Send money to online wallets (Extremely expensive)

Withdraw Cash From Your Credit Card

Withdrawing cash from your credit card may seem like a good idea however for a lot of people it won’t work. This is because you can only withdraw a small amount of money from your credit card and then only do so again once you have paid that money back.

For most people who are reading this, the fact that you want to invest with your credit card leads me to believe that this is not an option for you.

If you want to withdraw large sums of money, you would have to go to the bank that issued you the credit card and ask for permission to withdraw a certain amount of cash. It may seem simple however there is a catch with most financial institutions but not all.

You need to give them a reason why you want to withdraw the cash. They would often ask for proof as well. So, unless you are willing to lie, this is a roadblock that you will face and I never advocate for lying especially when it comes to investing. This can start to cause a spiral where you incur problem after problem.

Transfer Money From Your Credit card To Your Cheque Account

Again, most banks have a limit to how much you can transfer from your credit card. You also incur interest by doing this. So, unless you have an incredible credit record and earn enough money, you will not be able to transfer enough to invest.

Also, if you do meet those requirements, chances are you would not need to use a credit card.

Send Money To Online Wallets

Another method is to send money to online wallets. These wallets can include things like PayPal or even Transferwise. Once you have sent the money to those wallets, you can then send it to your bank account.

In order to do this, you would need to find a wallet with relatively low restrictions. Let’s say that you use PayPal. Once you withdraw a certain amount from PayPal they will ask you to verify your identity and could ask for tax information.

Is Buying Mutual Funds Indirectly With A Credit Card Worth It?

Absolutely not. Withdrawing cash from your credit card or transferring from your credit card to your bank account will incur too much interest. That interest can bite really hard and you might end up losing money as opposed to making money.

If you use online wallets, you incur interest and pay a lot of fees. Every time you deposit money into a wallet, you pay a fee and then pay again when you transfer that money.

Can You Buy Stocks With A Credit Card?

Yes, you can buy stocks via your credit card. It is essential to remember that in order to buy stocks you need a broker. A broker will accept a cash advance that you can pay with your credit card.

This includes some traditional stockbrokers and also a lot of online trading apps that allow you to use a credit card.

They can however charge extra cash advance fees that you will need to pay when paying your cash advance to the broker.

There are however a few problems that you might run into when doing this and it mostly has to do with risk and your financial institution or at least your card issuer.

Some brokers such as M1 Finance offer customers broker credit, where you can get up to $100,000 to invest directly from them.

It Is Extremely Risky

The first issue that I have with using your credit card to invest is the risk that comes with it. This mostly applies to people who go into debt with the credit card issuer.

The point of investing is to make money. It is also to make your life more financially healthy. However, when you go into debt and your investments don’t work out, you can end up losing a lot of money if not all of it.

If you are already struggling to find the money to invest, the last thing that you want is to go into debt which can end up ruining your financial health over the long term especially if your investments don’t work out.

It Could Be Expensive

Now, you need to consider all the fees that you have to pay including the interest that you will pay back if you went into debt on your credit card.

Also, your financial institution might realize that you are using the card to purchase financial products and they could flag your account which means you might have to pay additional fees.

Lastly, you need to work out whether or not the interest that you are going to pay on your credit card is worth it. Are you going to make more from your investment or are you going to pay more than you make?

As for the brokers, they might charge a higher cash advance fee if you pay via credit card. Make sure you check with your broker first.

Your Card Issuer Could Shut Your Account Down

This is rare but if the financial institution that issued your card deems that you are being irresponsible with your credit card, they could shut your account down. This leaves you in a bad financial situation because you still have to pay back the money that you owe. You won’t have a credit card to fall back on when you need money for your real-life situations.

Conclusion

I feel like it is important for me to give you my personal opinion based on experience. Using your credit card or any form of “borrowed money” to invest is a very bad idea. It can see you going from someone who is trying to create a better future for themselves to somebody who has ruined their financial credibility.

Your best option is to save the amount that you need to start investing and try and invest with the minimum that you can. When your portfolio starts growing you can then start investing larger amounts.

Related Article: Can you Buy & Sell a Mutual Fund in the Same Day?

Chris Race

I am an accountant from the U.K. specialising in Management Accounting, Personal & Business Tax, Financial Analysis, and Wealth Management. My passion for learning is what lead me to creating this blog. Stock market investing has always been a interest of mine, and since I was 18 years old... This interest has become a source of income for me and my family.

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