Investments through Credit Cards?

Many of us have grown so fond of rewards points that we even want to make our investments through credit cards.  Sounds good, right? It is like having a cake and eating it too. Many times, I hear this question (investment through credit card) at the end of the financial year when many of us are rushing to make last minutes tax-saving investments. Equity linked savings schemes (ELSS) are one of the popular investment destinations for tax-saving. A few don’t have money to invest; therefore they ask this question. They want to make investment in ELSS, save tax and pay (or hope to pay) the credit bill on time next month. They will net reward points too, but they are in for a negative surprise. You can’t make investments through credit cards.  So, you don’t really have this choice. And there are good reasons for this. Let’s find out.

Banks Can’t Afford Free Credit

When you use your credit card, the credit institution essentially offers you a short term loan. You get interest-free credit. If you keep paying your bills on time and in full, you do not have to pay extra penny over and above the amount you spend. However, from the perspective of the credit card company, somebody needs to bear the cost of loan. No lender can afford to give interest-free loans. The lender needs to recover the cost of credit from someone. And it does through the merchant. The cost is borne by the merchant. A certain percentage of the transaction value goes to the bank or network providers such as Visa/Master Card. Typically, the cost borne by the merchant ranges from 1%-3% but may vary based on the arrangement. Therefore, the cost comes from merchant’s profit margin. This is also a reason many small merchants ask you to pay more if you want to swipe your card. The idea is recover fee paid to the bank from you. At petrol pumps , you may have to pay fuel surcharge. The idea is somebody needs to bear the cost of your interest-free credit period. It has to be either you or the merchant. Banks don’t indulge in charity. Their aim is to run a profitable business.

Booked Ticket through IRCTC?

Quite clearly, credit card companies have no leeway with the Indian Railways.  The Indian Railways will just not share anything with the card companies. They don’t need to. It is a huge monopoly. People will not stop rail travel just because IRCTC does not accept credit card for payments. Therefore, if you have booked a railway ticket recently using your credit card, you will notice that you have to pay a service charge of 1.8% (plus services) of the booking amount. You have to bear the cost.

What Does This Have to Do with the Investment?

If you make your mutual fund investments through a credit card, somebody needs to bear the cost. AMC does not. Will you? The question is irrelevant since SEBI, the markets regulator does not permit Mutual funds investments through credit cards. In fact, SEBI recently allowed mutual fund investments through digital wallets. However, there is condition that the balance should be loaded in the cards through cash, debit card or net banking. Balance loaded through credit cards will not be allowed for investments. Moreover, digital wallet companies cannot offer any incentives for such investments. For MF investments, money has to come from specific bank accounts for which you have submitted the proof during KYC (or later).

Do note SEBI may have other reasons than just the cost. There is slightly academic angle too. If investments were allowed through credit cards, you could have taken loan against such investments and part repay credit card debt. A part of credit limit is again available for investments. Very complex risky investment structures can be made out of this. And you are not even betting your money. Credit card debt is unsecured debt. Clearly, this is not right.

There Are Exceptions

For instance, you can invest in NPS (National Pension Scheme) using your credit card but you have to pay an additional charge of ~1% (including service tax) for credit card payment. The credit institution needs to recover cost from someone. NPS trust will not bear and it simply asks you to bear. By the way, 1% is not less. For an investment of Rs 1,000, it may only be Rs 10. However, for an investment of Rs 1 lacs, the cost will be Rs 1,000. Huge, isn’t it? Do note NPS is regulated by PFRDA (Pension Fund Regulatory and Development Authority).

Insurance premium can be paid through credit cards. There is no extra cost to the customer. Insurance products are regulated by IRDA. Different regulators, different rules.

Conclusion

Investment using credit cards makes no sense. You are taking a debt that costs you in excess of 40% p.a. to invest in a product that is likely to yield much less. You may feel that there is no cost if you pay credit card bill on time. However, as discussed earlier, somebody has to bear the cost. AMC has no reason to bear such cost. It will compromise the fund’s investment performance. You will have to bear it. And paying 1%-2% on your investment through credit card is a foolish proposition. This upfront cost will clearly compromise returns. You may argue there is upfront cost attached with stock investments too in the form of brokerage. However, in that case, there is no option (at most, you can shift to discount brokerage to reduce the cost). With MF investments, you have an option. You can pay from your bank account. Therefore, in my opinion, it is good that investments through credit cards are not permitted. Plan your investments. And if you plan well, making investment through credit card will not even cross your mind.