You can buy crypto with a credit card but don’t miss out on the real cost

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You can buy crypto with a credit card but don’t miss out on the real cost

These days, it really seems like everyone has a bitcoin or some other cryptocurrency jingling in their digital pockets.

Even though the real number looks more like one in 10 Americans, it’s still a large number, and the fear of missing out on the next price hike is real.

If you don’t have the funds to make a large investment, it’s tempting to use your credit card. After all, you can just pay it with your crypto earnings, can’t you?

Well, maybe, but it turns out that buying crypto with a credit card can be extremely expensive. Until you understand the true cost, keep your Visa or Mastercard in its case.

Can you buy crypto with a credit card?

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Although some investment brokers like Robinhood allow you to buy cryptocurrency directly through their platform, many people buy crypto through specialized exchanges.

Keep in mind that while it is possible to buy cryptocurrencies with credit cards, not all crypto exchanges accept them.

This includes Coinbase, the largest exchange in the United States. On Coinbase, the only payment methods accepted in the United States are ACH (Automated Clearing House) bank transfers, debit cards, wire transfers, and PayPal.

That said, many exchanges accept credit cards, including Coinmama, CEX.IO, and eToro.

But just because you can buy crypto with a credit card doesn’t mean you should. Here’s why.

How does buying crypto work with a credit card?

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When you buy cryptocurrencies on an exchange, you need to choose a payment method to deposit money into the exchange. From there, you exchange that money for crypto.

Funding your account using ACH (i.e. by connecting your bank account) is usually the cheapest route, sometimes even free. The same cannot be said for credit cards.

While they can be practical, that convenience comes at a steep price.

Crypto exchange transaction fees

Cryptocurrency exchanges make money in different ways. Almost all of them take a cut every time you trade. This is true regardless of which payment method you use.

The story continues

However, when you pay with a credit card, there is a credit card fee on top of the normal trading fee.

Credit card fees vary from exchange to exchange. Before buying with a credit card, Google your foreign exchange fees to understand what you’re getting into.

For example, to buy cryptocurrencies on Coinmama with a credit card, you need to pay:

All of these fees are built into the price of the transaction, so you might not even realize how much you are losing unless you compare it to the actual exchange rate.

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Let’s say you want to buy bitcoin. If you wanted to invest $ 1,000 in bitcoin through Coinmama, you would pay:

In other words, you would need a 10.9% ROI just to break even on these fees.

But currency exchange fees are only part of the equation. It’s even worse.

Cash advance fees

Chase, Capital One, American Express, Citi, and other major U.S. credit card issuers treat cryptocurrency purchases as cash advances.

So, in addition to currency exchange fees, you are also affected by cash advance fees from your bank.

Cash advance fees vary by institution, but Chase and Citi, for example, charge $ 5 or 10% of the cash advance, whichever is greater.

So, in our example of a $ 1,000 bitcoin investment, you are considering an additional $ 100 cash advance fee on top of the $ 109 exchange fee.

In other words, by using a credit card, you lose over a fifth of your investment in fees.

To make matters worse, cash advances don’t have a grace period like regular credit card purchases, which means interest starts accruing from the time you make your purchase.

The moral of the story: To avoid costly surprises, call your credit card company and ask how they handle cryptocurrency purchases.

Other expenses

When you use a credit card to buy cryptocurrency from exchanges based outside the United States, you can add an additional foreign transaction fee, typically 3%.

For this reason, it’s a good idea to check out an exchange location before making a purchase.

If you use a card with no foreign transaction fees like Chase Sapphire Preferred or Capital One Venture, you can avoid them.

Daily limit

Some exchanges have daily limits on the amount of crypto you can buy with credit cards. For example, on the Bitpanda exchange, credit card deposits peak at around $ 3,050 per day.

In addition to the daily trade limit, you should also keep an eye on your card limits.

Pros and Cons of Buying Crypto with a Credit Card

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Benefits

There aren’t really any benefits to paying for crypto with a credit card.

Normally, credit cards offer reward points and special protections. But because credit card companies treat crypto purchases like cash advances, you don’t accrue these benefits.

The inconvenients

When you use a credit card, you are hit with several fees. These fees are not associated with other payment methods such as ACH transfers. To see a positive ROI after paying these fees, you have to get out of a deep hole.

Other considerations

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Before buying cryptocurrencies with a credit card, consider these other important factors.

Scams

Buying cryptocurrency online is still a foreign concept for millions of newbie investors. This makes them easy prey for fraudsters.

Before diving into the world of cryptocurrencies, it is important to familiarize yourself with common scams.

One of these scams involves bogus crypto exchanges disguised as legitimate websites. If you are the victim of online credit card fraud, your card fraud protection should have you covered, but it’s best to be cautious and prevent it from happening in the first place.

Debt

While it is exciting to ride the crypto wave, it is still an extremely volatile investment. Avoid investing money that you cannot afford to lose. If your only way to buy crypto is to accumulate credit card debt, chances are you can’t afford to lose.

Not only is going into debt to buy crypto risky, it can lower your credit score as well. Having a higher credit card balance increases your use of credit, which hurts your credit score.

If you are considering taking out a mortgage, car loan, or personal loan, the debt you have accrued with your crypto purchase can indirectly affect the rates you qualify for.

Restrictions

Some exchanges have special rules for credit cards. If you don’t read the fine print before you buy, you might find yourself in a tight spot.

Author’s Note: I have already used my card to buy Bitcoin on eToro, planning to transfer it to a secure wallet immediately. After purchasing, I realized that credit card purchases cannot be transferred out of exchange for 60 days. Whoops!

Crypto as a credit card reward

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Buying cryptocurrency with a credit card is a bad idea, but there are other ways you can use your card to get your hands on crypto.

One way is to use a crypto rewards credit card. These cards are similar to traditional reward cards, but instead of earning cash back rewards or airline miles, you earn crypto (or you can redeem your reward points for them).

You can also use a cash reward card and then use your cash rewards to buy crypto.

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