Why You Should Never Finance Investments with Your Credit Card

Wells Fargo and Company (WFC) on Monday, June 11th announced that it would no longer permit its customers to buy cryptocurrencies with WFC issued credit cards. In its statement, the bank said, “We’re doing this in order to be consistent across the Wells Fargo enterprise due to the multiple risks associated with this volatile investment. This decision is in line with the overall industry.”

 

Wells Fargo is four months behind the “overall industry.” In January, Bank of America, J. P. Morgan, Citigroup and Capital One stopped credit card cryptocurrency purchases. At the end of January, bitcoin (BTC $6405 6/14/18) was trading at over $10,000 per coin. By the time Wells Fargo banned bitcoin buying, BTC had dropped below $7000. Wells Fargo added, “We will continue to evaluate the issue as the market evolves.” Could WFC reconsider it and again provide unsecured loans for purchase of the most volatile and least collateralized investment since tulip bulbs?

 

Major bank bans of credit card cryptocurrency buying came immediately after a LendEDU poll of bitcoin investors reported that 18% of BTC buyers used a credit card to do so, and Coindesk, also in January, found that only half of the cryptocurrency credit card buyers they surveyed had repaid their debt. The Federal Reserve also reported that in November, the month before the BTC peak price, credit card balances jumped by 13.3%. Credit card balances were soaring just as the price of bitcoin was peaking. BTC is now one-third the price peak it reached in December.

 

The fact that Wells Fargo was the last of major banks to act on credit card cryptocurrency purchases further adds to its reputation as an entity that prioritizes corporate profits over consumer protection. In 2017, Wells Fargo admitted to creating 3.8 million fake accounts and charging 570,000 customers for unneeded auto insurance.

 

Borrowing money to buy an investment adds time and interest rate risk to an already complex financial decision. The Federal Reserve Board regulates which stocks are available for purchase on margin. Holders of accounts regulated by the Securities and Exchange Commission (SEC) may borrow money to buy, using the securities held in their accounts as collateral, for up to 50% of the value of those securities. Purchase of penny stocks and initial public offerings (ICO’s) on margin are not allowed. Cryptocurrencies, because no assets or income support their valuations, are inherently subject to more speculation and volatility. The increase in risk of lending money to a cryptocurrency investor without requiring collateral is beyond measure.

 

For the potential credit card buyer of cryptocurrency, the cost of the loan can wipe out any gain, if there is a gain, on the investment. Consider credit cards now offered with cash and travel rewards available upon opening a new account:

 

Credit Card

Signup Bonus Value

Spending Required

Annual Fee

APR%

Purchase

APR% Cash

Cash Fee

Foreign Transaction

Fee

Wells Fargo Cash Wise Visa® Card

$200 (Cash)

$1,000 within 3 mos.

$0

0%

(12 mo.)

14.49%-

26.49%

25.49%-

27.49%

5%

3%

Chase Sapphire Preferred

$625 (Travel)

$4,000 within 3 mos.

$95

($0 1yr.)

17.49%-

24.49%

26.49%

5%

None

Capital One Spark Cash For Business

$500 (Cash)

$4,500 within 3 mos.

$95

($0 1yr.)

13.49%-

23.49%

24.49%

3%

 

None

Capital One Venture Rewards Credit Card

$400 (Travel)

$3,000 within 3 mos.

$95

($0 1yr.)

14.49%-

24.49%

24.49%

3%

None

Bank of America® Travel Rewards Credit Card

$200 (Travel)

$1,000 within 3 mos.

$0

0%

(12 mo.)

16.49%-

24.49%

19.49%-

26.49%

5%

None

Chase Freedom

$150 (Cash)

$500 within 3 mos.

$0

17.49%-

24.49%

26.49%

5%

None

Source: moneyunder30

 

If one were to have established a Wells Fargo Cash Wise Visa® Card account before its cryptocurrency ban and, on June 8th, purchased 2 Ether ($518 6/14/18) coins for $607 at 4PM New York time, one would have qualified for the $200 cash reward which would become available two billing cycles after the first three months of credit activity. Then one could have paid the 0% interest rate available for the first twelve months and thus would be able to receive a $200 check before Christmas.

 

However, if Wells Fargo classified the purchase of the Ethereum digital coins as a cash advance, the borrower would not qualify for the $200 rebate and would have been charged a 5% cash advance fee ($60.70) and an immediate interest rate of 27.49% ($137.09 over 5 months). If WFC also classified the cryptocurrency purchase as a foreign transaction, an additional 3% ($36.42) fee would have been charged. Including all costs, the two Ethereum digital coins purchased with the credit card would have to rise 48%, from its current price over the next five months in order for the credit card purchaser to break even on the investment.

 

Banks lend money in order to make money. They lend at the lowest interest rates and fewest fees to those customers who are deemed the least risk of default—those who do not need to borrow. Those who must borrow must pay a higher price for the money. Borrowing money to buy investments adds risk to an already uncertain outcome. Borrowing money on terms such as those offered by credit cards makes profit from nearly any investment improbable at best, especially if that investment is the most volatile and least collateralized ever invented.