Master Your Card

Here’s a new one. In all my years of banking I’ve never been asked if someone could purchase things like mutual funds with a credit card. Today I got asked the question, and after recovering from my initial shock I told the member that most fund companies did not allow their funds to be purchased on a credit card. He seemed genuinely upset about it, so I asked him why he wanted to know.

He launched into a long story about how he had a 401(k) at his previous employer, but had to cash it in to pay for his wife’s medical bills. She passed away, but now he’s left with nothing for retirement. He’s contributing to his current employer, but he’s so far behind the mark that he won’t have nearly enough come retirement and he’ll have to keep working. He was looking for a quick solution to get the ball rolling in his favor. He only wanted the money to initially start the fund and then he would start adding to it as he was able to from his paycheck. I advised him to speak to one of our financial advisors and set him an appointment for later this week.

Not that I don’t sympathize with his situation, but the fact that he immediately thought to put this on a credit card was a little disturbing. Just looking at this from a risk and reward standpoint, there is a certain amount of risk in buying securities with a credit card. Obviously, a mutual fund can lose value. Can you imagine the fund going completely under and owing that money to the credit card? With interest? For that reason alone I’d advise against buying securities with a credit card.

Technically I suppose it’s possible to purchase securities with your credit card. Brokerage firms and fund companies won’t take a direct payment from the credit card – nor do they take the credit card checks either – however, they will accept electronic funds transfers from another bank. It would be a simple matter to call the credit card company and set up a wire, if your credit card company does that, or simply do a cash advance and have the money wired from your checking account. So, there is a roundabout way of doing it, it’s just not advisable.

But, on a regulatory note, there are laws that limit how much can be bought using “borrowed” money, including that from credit cards. Here’s where I get a little gray and the reason I refer people to the financial advisors. I know the rule on borrowed money in investments. Typically, an investment firm will allow you to borrow money from an existing brokerage account to invest towards something else. This is called a “margin account” and it’s got its own limit on how much can be borrowed. This limit is known as “margin requirements” and will vary from investment firm to investment firm; however, the standard is about 50%. So, what that means is if you’ve got a brokerage account with Edward Jones worth $150,000 and they go by the 50% rule on margin accounts, then you can technically borrow up to $75,000 to invest elsewhere.

Now, my understanding for the official reason that credit cards can’t be accepted is because allowing investors to use credit cards would be allowing them to use 100% borrowed money to purchase securities which exceeds federal and investment house regulations. I could be wrong, but I believe the SEC’s max is 50%, which is why most firms stop there, though some are less. That makes sense if using an actual credit card; however, if a customer does a cash advance and then deposits the money into their checking account, there’s no way for the investment firm to tell that that money came from a credit card. So, how they regulate that, I’m not sure. I know that brokers are required to ask a ton of questions at account opening, but someone could simply lie.

Anyway, if anyone has any idea how that’s monitored, I’d love to know. But, in reference to putting investments on a credit card, it’s not allowed directly and probably not in your best interest so I’d avoid it. There are better ways to come up with money to invest. Most people don’t realize that it doesn’t take much to start an investment account. If you go to a big brokerage house, they may require thousands to get started, but if you just need to open a mutual fund and start saving, check your local bank or credit union. They have investments there and you can usually start an account with $25 and set up automatic deposits to the account. I can pretty much guarantee that’s the path our financial advisor will send the customer down when they meet.

What do you guys think? If it were directly allowed, would this be something you’d consider?