Credit cards are among the best financial inventions. Using it, individuals can easily pay for their groceries, rent, utility, movies and flight tickets. This allows them to put their bills in the line of credit, which they can pay later, without any interest, if paid within the grace period. On top of these, lenders reward cardholders on every credit card purchase.
But is it possible to invest in stocks using credit cards? Or rather should you consider investing in stocks using credit cards? Keep reading to find out the answers to these questions.
Can I Use a Credit Card to Purchase Stocks?
As per the Security and Exchange Board of India, credit cards cannot be used for any sort of financial investment. Furthermore, it has been specified to only use deposit funds or savings to invest in stocks. This was to safeguard both the lenders’ and borrowers’ interests, as out of 49 million credit card users in India, only 20% can repay the loan on time.
In case a borrower fails to repay their credit card debt, they will be liable to pay a heavy penalty and interest rate on the outstanding balance. Furthermore, purchasing stocks via credit card also increases the lender’s credit risk. We will be discussing the risks associated with investment via credit card in the upcoming section.
What Are the Risks of Purchasing Stocks with Credit Cards?
Market investments of any sort carry risks, let it be for the investor or the issuer. Investing in market instruments using credit can bring more trouble for both parties. Let’s look at some of the issues that could have arisen due to credit card payments.
- May Indicate a Lack of Financial Stability
Purchasing stocks on credit may already indicate that your finances do not support the risk or the cost associated with investing in the stock market. In that case, you should wait and invest in stocks when you have enough cashflow to support your investment.
- Increase in Liability
Stocks are volatile and subject to market risk. Therefore, it is quite common to witness beginners losing money on their first attempt to invest in the stock market. However, if these investments were made via credit card, that would have added to the financial liability.
- Risk of Getting Into a Debt Cycle
Irrespective of gains or losses made on stock investments via credit card, an investor has to repay their credit card debt. Furthermore, failing to repay the loan on time would have further incurred high interest and penalties, which may get them into a debt cycle.
Although purchasing stocks through credit cards is banned in India, let us hypothetically understand the risk associated with using credit cards for purchasing stocks
Let us assume you purchased stocks worth ₹100 via credit card. Now, imagine the stock value drops to ₹60. In this case, you will have to bear a ₹40 loss, on top of your credit card charges. To clear your credit card balance, you may have to take on a larger debt, which can culminate into a debt trap.
Is It Legal to Buy Shares Using Credit Cards?
As stated before, SEBI has banned the use of credit cards for any form of investment. Therefore, it is illegal to purchase stocks using a credit card. Although it is technically not possible to pay for stocks using credit cards, any illegitimate transaction may lead to legal consequences.
Furthermore, credit cards in general provide unsecured loans. As they can be used for any purpose, there is a high chance of fraud. This means that if you were to invest in stocks using credit cards, the recovery process would be tedious and time-consuming for the lenders and the market regulator.
If you want to earn credit card rewards and secure a healthy credit score, you can consider using it for other activities. However, you should remember that credit cards are debt facilities and hence, should never be used to avail even more debt.
If you want to purchase stocks, the best way to do it is to start saving money. Then, you can use your surplus funds to finance market investments.
Frequently Asked Questions
How do I get to know about my credit score?
You can also access your credit score via your broker’s app for free. However, to get an in-depth report including your transactions and credit history, you need to access your Credit Information Report through any credit bureau in India.
Can I take personal loans to purchase stocks?
Yes, individuals can avail personal loans to purchase stocks in India. However, it is advisable to avoid using any credit facility to borrow more money, as it adds to one’s liability and makes it difficult to repay loans.
Can I invest in stocks using my debit card?
As per SEBI regulation, only credit cards are banned from getting into financial debt. However, one can invest in mutual funds and stocks using a debit card.
What are the interest rates applicable on credit cards?
The interest rates on credit cards in India are anywhere from 13% to 48% depending on the lender and the type of credit card issued.
Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 4+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.