Why Using a Credit Card to Buy Crypto Is Often a Bad Idea

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  • Investors may have to pay fees to both the exchange and their bank if they use a credit card to buy crypto.
  • Many banks treat crypto purchases as cash advances, if they allow them at all. This can mean there's no grace period, and potentially higher interest rates, too.
  • Most cryptocurrency exchanges allow investors to deposit money via bank transfer for free.

Considering buying crypto with a credit card? Read this first.

I can understand the appeal of buying crypto on a credit card. If both your bank and crypto exchange will allow it (not all of them do), it can be a quick and easy way to pay. Sometimes you just don't want to mess around and wait for a bank transfer or other payment method to process.

It's tempting to whip out your credit card because Bitcoin's just dipped to its lowest point in 18 months (again) and you want to buy the dip. But, as recent months have shown us, rushing into investment decisions rarely works out well. Even if you do manage to catch the market bottom and prices don't fall even further tomorrow, the costs of using your card for the purchase will often wipe out any savings.

There are a number of extra costs and disadvantages of using a credit card to buy crypto. Here are three of them.

1. The fees can really add up, especially if your bank treats it as a cash advance

If you use a credit card to buy crypto, you could be hit by a double fee whammy: Both the exchange and your bank may charge you. Crypto exchange fees can be as high as 5% on credit card payments. Most exchanges allow you to deposit money via a bank transfer for free, making it a much more cost-effective option.

Plus, many banks treat crypto exchange deposits as cash advances, which are a very costly way to withdraw money -- there's often a fee of 3% to 5%. In a worst-case scenario, you could lose 10% of your money to fees before you've even bought any crypto.

That's before you factor in the interest fees. Unlike normal credit card transactions, which don't start accruing interest until your statement's payment due date, some cash advances start accruing interest straight away. As if that's not bad 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 planned to use your credit card to buy crypto so that 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 payments count towards that introductory bonus offer. In many instances, credit card rewards are aimed at actual spending, rather than things that could be construed as cash withdrawals.

One of the major drivers behind last year's crypto frenzy was the fear of missing out. As headlines of dramatic price increases and crypto millionaires filtered into mainstream consciousness, people felt like this could be their chance to get in on the next big thing. But some people didn't have cash to spare, and may have either borrowed or taken money away from other financial goals to use for crypto investments.

The trouble 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 it's now worth less than you originally paid for it. The hope is that Bitcoin's price will eventually recover. But if you've borrowed to make the initial investment, it may be difficult to wait out that drop in prices.

Imagine if you'd bought $500 of Bitcoin last year when it was worth $60,000, and used a credit card. If you weren't able to pay off the balance immediately, it would start accruing interest -- potentially at around 20% APR or more. Given that the value of Bitcoin then began to fall, you could have quickly found yourself in a position where you were paying high rates of interest on an asset that was no longer worth what you paid for it. If you tried to sell that Bitcoin today to pay down the debt, you'd only cover part of the original $500 -- it would now be worth around $170.

Bottom line

The golden rule of crypto investing is to only spend money you can afford to lose. That means shoring up your financial bases, such as paying down debt and building up an emergency fund before you spend a cent on crypto. Using a credit card flies in the face of that logic. Cryptocurrencies are highly volatile investments; market leader Bitcoin has lost around 70% since November. If you borrow money to spend on risky assets, you could find yourself paying interest on an asset that has devalued with no guarantee it will ever recover.

A better plan? Assuming you've researched the long-term potential of crypto and understand the risks involved, make a crypto investment plan. Look at your budget and see how much money you can realistically spare each month. Look for crypto exchanges that offer free deposits via bank transfer. You might then consider buying Bitcoin automatically on a set date, or putting some cash aside each month and keeping it until you're ready to invest. The idea is that you position yourself to benefit if prices go up, but won't face financial disaster if prices fall.

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