December 2, 2021

Why Buying Crypto With a Credit Card Is Such a Costly Mistake

Cryptocurrency has been one of the trendiest investments of 2021. From Bitcoin to Ethereum to Dogecoin, there are hundreds of coins on the market, and celebrities like Elon Musk and Mark Cuban have been touting their benefits. If you don’t own any crypto, it can feel like you’re missing out.

However, getting in on the action could be as simple as charging your credit card – much to the chagrin of some financial professionals. “Crypto exchanges have made it alarmingly simple to purchase cryptocurrency with a credit card,” says Steve Larsen, co-founder of PlannerDAO, a cryptocurrency education community for financial planners, and adjunct professor of finance at Gonzaga University, where he teaches classes in cryptocurrency and financial planning. “If you wouldn’t buy shares of Apple stock on your credit card, you shouldn’t be putting Bitcoin on your card, either.”

Yet many people do so every day. Maybe you’re thinking about it, too. Before you do, learn how the process works and the potential risks.

Can You Buy Crypto With a Credit Card?

The short answer is yes, you can buy cryptocurrency with a credit card. However, this largely depends on your credit card issuer and the cryptocurrency exchange platform, says Maxim Manturov, head of investment research at Freedom Finance Europe, an international investment company.

To buy and sell cryptocurrency, you first need to join an exchange. This is a platform that facilitates crypto transactions, much like a stock exchange. Many of the most popular exchanges don’t allow credit card transactions. For instance, one of the largest crypto exchange platforms, Coinbase, allows credit card purchases in Europe and the United Kingdom but not in the U.S., Manturov says. On the other hand, exchanges such as CEX.IO, eToro and Coinmama do accept credit cards in the U.S., but only Visa and Mastercard.

“However, the main drawback isn’t actually the availability of credit cards as a payment method, but rather the fees involved with purchasing via a credit card,” Manturov says. For example, Coinmama charges a transaction fee based on the market rate plus 2%, a commission of up to 3.9% and an additional 5% fee if you choose to buy with a credit card. So for an investment of $1,000, you’d have to pay $109 in fees.

In addition, Manturov notes that you’ll likely be hit with additional card fees – if your issuer allows crypto purchases at all. Although issuers such as Chase and American Express allow you to charge cryptocurrency purchases to your card, they consider cryptocurrency to be a cash equivalent, and therefore treat the transaction as a cash advance, which comes with much higher interest rates and a 5% cash advance fee.

How to Buy Crypto With a Credit Card

The process for buying crypto with a credit card is fairly straightforward:

  1. Find an exchange that allows credit card transactions. Your first step is signing up for a crypto exchange that allows you to use a credit card. Depending on which one you choose, you may have to share some personal information and verify your identity. (If the exchange allows credit card transactions, it’s almost certain you will.)
  2. Double-check that your card issuer allows crypto purchases. Before you go any further, contact your credit card company to verify that it allows crypto purchases. Also ask whether those transactions will be treated as regular purchases or cash advances.
  3. Enter your payment method. Next, you’ll need to input your card information and save it as a preferred payment method.
  4. Set up your transaction. Select which cryptocurrency you wish to purchase, in what currency and the amount you want to buy. Once you’ve confirmed all the details, go ahead and purchase.
  5. Pay off your balance as soon as possible. It’s important to avoid letting interest rack up on your credit card balance, especially because you’ve already had to pay hefty fees for the transaction and you’re likely getting charged the higher cash advance annual percentage rate. Make it a priority to pay off your balance as soon as you have the funds.

One way around this process is to buy crypto with credit card rewards. A handful of credit cards, such as those offered by BlockFi and Gemini, issue rewards in the form of crypto. This allows cardholders to avoid the fees associated with crypto purchase transactions. The Venmo credit card also recently gave cardholders the option to use their cash back earnings to purchase a crypto of their choice, which is selected ahead of time and automatically purchased at the end of each billing cycle. Again, the fees are waived for autopurchase transactions.

Pros and Cons of Buying Crypto With a Credit Card

Just because you can buy cryptocurrency with a credit card doesn’t necessarily mean you should, but there are some benefits:

  • You can invest without having the cash on hand. If you want to buy a certain coin before you believe its value will increase, using a credit card can allow you to make the purchase right away. This can ensure you don’t miss out on large upward swings while you wait to save up for a purchase.
  • Potentially earn rewards on your investment. If your card issuer treats crypto transactions as regular purchases, you may also be able to take advantage of lower interest rates and earn rewards back on your spending.

However, there are many drawbacks to consider:
Cons

  • Purchases are often treated like cash advances. Cardholders may be unaware that crypto purchases may be treated as cash advances by their issuers. “This would lead to higher fees, no grace period for interest charges and no card rewards on the amount advanced,” Larsen says. The typical cash advance fee is 3% to 5% of the transaction amount. Plus, while the average interest rate for regular credit card purchases is 16.22%, the average rate for a cash advance is 24.8%. “You better pick the right coins, because while your crypto returns are hypothetical, your credit card fees are very real,” Larsen adds.
  • Higher fees in general. In addition to the potential costs imposed by your card issuer, you will likely also have to pay an additional fee to the crypto exchange platform every time you make a transaction. That means your crypto returns would have to be pretty significant before you just break even.
  • Your credit score could take a hit. One of the major factors affecting your credit score is the total amount of debt you owe, also known as your credit utilization. Having a high utilization is a red flag that you’re overly reliant on credit to get by, which will cause your credit score to go down. Putting crypto transactions on a credit card increases your outstanding balance; if you don’t pay it off right away, your score could drop.
  • Even more risk. Cryptocurrency is already a volatile investment. By purchasing it with credit – as in, money you don’t actually have – it’s a sign you can’t really afford to lose that money. Additionally, if you don’t pay off your balance quickly, interest charges could easily wipe out any returns since your purchase will likely be treated as a cash advance and start accruing interest immediately, and at a higher rate. Most importantly: If your crypto investment loses value, it compounds those losses.

If you want to get in on the crypto craze but have to rely on credit to do so, it may be a sign you aren’t ready. “I have found most people who purchase crypto on credit aren’t focused on building a portfolio – they are trying to reduce their exposure to their least favorite asset class: FOMO,” Larsen says. Don’t let fear of missing out plunge you into debt.

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