Buying crypto with a credit card can cost you an additional 7% or more
Judging by the headlines, it looks like everyone and their dog are buying cryptocurrency these days. And even popular finance gurus like Suze Orman have started recommending taking some crypto as a long-term investment.
If you’re planning to jump on the Bitcoin bandwagon, however, you might want to avoid using your credit cards to pay for your crypto purchase.
Between exchange fees and issuer fees, your credit cards may very well be the worse way to invest in crypto. All in all, you’ll likely need at least 7% – if not more – additional fees just for using your credit cards to complete your crypto purchase.
One Email a Day Could Save You Thousands
By submitting your email address, you consent to our sending you money advice as well as products and services which we believe may be of interest to you. You can unsubscribe anytime. Please read our privacy statement and terms and conditions.
A fee of 2% (or more) goes to the exchange
As with stocks, you will be using a crypto exchange to purchase various digital currencies. So, the first fees you will encounter when trying to use your cards to buy crypto are those charged by the exchange.
Exchanges will generally charge a credit card fee to purchase crypto, as credit card issuers charge a processing fee for every credit card transaction, including crypto purchases. These fees can vary widely depending on the issuer – and even the specific card – but they average around 2% of the transaction amount.
In some cases, the exchange may also add its own fees, beyond the processing fee, for you to use a credit card. This could easily bring your foreign exchange fee to 3% or more.
Oh, and that’s all assuming you find an exchange that accepts credit cards in the first place. Many issuers have banned crypto purchases by credit card altogether. So you may need to do some research to find a reputable crypto exchange that allows credit card purchases.
At least 5% will go to the credit card issuer
While currency exchange fees can add up, they can be pale compared to the fees charged by your card issuer. This is because most credit card issuers categorize crypto purchases as a cash equivalent transaction.
In other words, your credit card issuer will treat your crypto purchase as a cash advance, much the same as if you used your card to withdraw money from an ATM. There are several drawbacks to cash advances that fundamentally negate any potential advantage of using a card to buy crypto.
On the one hand, cash advances have a cash advance fee that varies between 3% and 5% of the total transaction amount. So if you buy $ 100 worth of crypto with your card, you’ll pay $ 5 or more in cash advance fees.
Additionally, cash advances do not have a grace period, so you will start earning interest on your crypto purchase as soon as the transaction lands in your account. Cash advances also tend to have higher interest rates than regular purchases, so these fees will add up quickly.
If you think you can earn more than the fees with credit card rewards, think again. Transactions classified as cash advances do not earn purchase rewards. So your favorite travel rewards card won’t earn a single point or mile, and you won’t see a penny in cash back either.
And don’t expect your crypto purchase to help you earn a signup bonus, either. Cash advance transactions will not count towards the expenses required for a credit card signup bonus.
Better Ways to Buy Crypto
While you should definitely avoid using a credit card to buy crypto, you have several other options. For those who use plastic to pay, most major crypto exchanges will accept debit cards. If your debit card earns you rewards, you can even earn points or cash back (but your mileage may vary here).
Perhaps the most widely accepted way to buy cryptocurrency is through ACH transfer. This is a direct transfer of funds from your bank account to your foreign exchange account. ACH transfers have a very low processing fee, so your exchange may not charge you anything at all for the transaction.
Cryptocurrency may be all the rage these days, but you don’t need to make any hasty investments. Not only should you carefully research How? ‘Or’ What buy, but you also need to make sure you know What you buy. Crypto is a volatile investment at best, so make sure you are well informed before you get started.