Why using a credit card to buy crypto is often a bad idea
Thinking of buying crypto with a credit card? Read this first.
- Investors may incur fees both at the exchange and at their bank if they use a credit card to buy crypto.
- Many banks treat crypto purchases as cash advances, if they allow them. This may mean that there is no grace period and interest rates may also be higher.
- Most cryptocurrency exchanges allow investors to deposit money via wire transfer for free.
I can understand the appeal of buying crypto on a credit card. If your bank and crypto exchange allow it (not all allow it), it can be a quick and easy way to pay. Sometimes you just don’t want to waste your time and wait for a wire transfer or other payment method to be processed.
It’s tempting to whip out your credit card because Bitcoin just plunged to an 18-month low (again) and you want to buy the dip. But, as the past few months have shown us, rushing into investment decisions rarely works well. Even if you manage to catch the market bottom and prices don’t fall even more tomorrow, the charges for using your card for the purchase will often wipe out any savings.
There are a number of additional costs and disadvantages of using a credit card to buy crypto. Here are three.
1. Fees can really add up, especially if your bank treats them like a cash advance
If you use a credit card to buy crypto, you could suffer a double whammy: the exchange and your bank may charge you. Crypto exchange fees can reach 5% on credit card payments. Most exchanges allow you to deposit money via wire transfer for free, making it a much more cost-effective option.
Additionally, many banks treat crypto exchange deposits as cash advances, which are a very expensive way to withdraw cash – often there are 3% to 5% fees. In the worst case, you could lose 10% of your money in fees before you even bought any crypto.
This is before taking interest charges into account. Unlike normal credit card transactions, which don’t start earning interest until your statement’s payment due date, some cash advances start earning interest immediately. As if that weren’t enough, the interest rate may be higher on a cash advance than your normal rate.
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2. It may not count towards your credit card rewards
If you were planning on using your credit card to buy crypto so you could qualify for an introductory bonus offer or get spending rewards, think again. Check the terms and conditions to find out what type of payment counts for this introductory bonus offer. In many cases, credit card rewards target actual spending, rather than things that could be construed as cash withdrawals.
3. It is not recommended to borrow money to buy a high-risk asset
One of the main drivers of last year’s crypto frenzy was the fear of missing out. As headlines about dramatic price increases and crypto millionaires filtered into the mainstream consciousness, people thought this might be their chance to partake in the next big thing. But some people had no money to spend and may have borrowed or withdrawn money from other financial goals to use for crypto investments.
The problem is that crypto is an extremely risky asset – many people who bought it last year are now underwater. Being underwater is when your investment devalues so much that it is now worth less than what you originally paid for. The hope is that Bitcoin price will eventually recover. But if you borrowed to make the initial investment, it may be hard to wait for that price drop.
Imagine if you bought $500 worth of Bitcoin last year when it was worth $60,000 and used a credit card. If you were unable to repay the balance immediately, interest would begin to accrue, potentially at around 20% or more. Since the value of Bitcoin then began to fall, you could have quickly found yourself in a position where you were paying high interest rates on an asset that was no longer worth what you paid for it. If you tried to sell that Bitcoin today to pay off the debt, you would only cover part of the original $500 – it would now be worth around $170.
At the end of the line
The golden rule of crypto investing is to only spend money that you can afford to lose. This means strengthening your financial basics, such as paying off debt and building an emergency fund before spending a dime on crypto. Using a credit card goes against this logic. Cryptocurrencies are highly volatile investments; The Bitcoin market leader has lost around 70% since November. If you borrow money to buy risky assets, you could find yourself paying interest on an asset that has devalued with no guarantee that it will ever recover.
A better plan? Assuming you have researched the long-term potential of crypto and understood the risks involved, develop a crypto investment plan. Look at your budget and see how much money you can reasonably save each month. Look for crypto exchanges that offer free bank transfer deposits. You could then consider buying Bitcoin automatically on a fixed date, or setting aside money each month and holding it until you are ready to invest. The idea is that you position yourself to benefit if prices go up, but you won’t face financial disaster if prices go down.
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