Credit Card Investments in India: Advantages, Disadvantages and Risks

After demonetisation, the use of debit cards and credit cards has skyrocketed. According to RBI, as of August 2023 over 9.13 crores credit cards were active, which is a 17% increase from last year of about 7.8 crore active credit cards. These cards offer unparalleled convenience, allowing you to purchase anything from groceries and medicine to tickets and services. While both are widely accepted, credit cards hold the upper hand due to their rewarding nature. However, credit cards take a back seat when it comes to investing. In this article, let’s understand which investments can be made using a credit card in India and why many investments do not accept credit cards.

Credit Card Investments

Credit cards are considered one of the best financial inventions. They allow you to borrow money to pay your bills without any interest if paid within the grace period. On top of this, they help you save on your bills and offer rewards and cashback. Despite being a very useful financial tool, credit cards cannot be used for investments. There are very few investments that accept credit cards, but a majority of the investments don’t.

You can only invest in National Pension Scheme (NPS), gold, and insurance products using credit cards. Stocks and mutual funds do not accept credit cards for investment.

Why Can’t You Use Credit Cards for Mutual Funds and Stocks?

There are multiple reasons why you can’t invest in mutual funds and stocks through credit cards, and the following are some of them.

• Regulatory restrictions: The Securities and Exchange Board of India (SEBI) doesn’t allow investors to use credit cards to invest in stocks and mutual funds. Recently, SEBI allowed investments through debit cards and digital wallets. In the case of digital wallets, it is important that you load the funds through cash deposit, net banking or debit card. You cannot use the money that you loaded in your digital wallet through your credit card for investments.
• Credit cards are not savings: SEBI specified that only savings or deposit funds will be used for investing. Since credit cards are pre-approved loans and not savings, you cannot use them to invest in mutual funds, SIPs or stocks.
• Unable to trace the source: For SEBI, it is important to trace the source of funds used for investing. In the case of savings or deposits, the source can be easily traced. However, in the case of credit cards, it is difficult to trace the source of the funds.
• No trail of funds: A savings account has a proper paper trail which shows the deposits and withdrawals separately. In the case of credit cards, the trail of funds is unclear. The money could’ve originated from personal savings, bank loans, or a debt taken from family members. Since it is difficult to track the inflow and outflow of funds, SEBI restricted the use of credit cards.

Investing in NPS Using a Credit Card

One investment that allows you to invest through a credit card is NPS. The National Pension Scheme (NPS) is a retirement pension scheme introduced by India’s government. The government regulates this scheme along with the Pension Fund Regulatory and Development Authority (PFRDA), which was exclusively set up to oversee the activities of the scheme.

Under NPS, you can invest a certain amount every year from the age of 18 until 60. After the age of 60, you will receive a lump sum amount (60%) as a retirement benefit, and the rest (40%) is utilised to buy an annuity plan, which will pay a regular pension for your entire life. All Indian citizens and non-resident Indians (NRIs) can invest in NPS to secure their financial future.

NPS has two types of accounts, namely Tier 1 and Tier 2. The minimum investment in a Tier 1 account is Rs 6,000 per annum, and the maximum is Rs 1.5 lakhs per annum. Tier 2 is a voluntary account and has more flexibility than Tier 1 accounts. The minimum investment in a Tier 2 account is Rs 250 per annum. Unlike a Tier 1 account, the investment in a Tier 2 account can be withdrawn anytime.

You can invest in NPS through entities such as banks, which are known as Point of Presence (POP). To find POPs near you, you can visit the PFRDA website. You can visit the POPs personally or go to their website online. Fill in the NPS application form and submit all necessary documents, such as identity, address, and age proofs.

After submitting the documents, you can pay online or offline. If you want to use your credit card, you must use the online mode. To pay through a credit card, log in to your NPS account and select ‘Transact Online’ followed by ‘Contribute Online’ tabs. During payment, choose the credit card option and pay your contribution.

Once the payment is made, you will be assigned a 12-digit unique number called Permanent Retirement Account Number (PRAN), which will help you pay your investment dues and check your balance in the future.

Advantages and Disadvantages of Using a Credit Card for Investments

The following are the advantages of using a credit card for investments.

• Higher rewards: Credit cards are designed to offer rewards. So, the more you use your credit card, the higher the rewards will be. Moreover, banks also encourage users to use credit cards with milestone benefits and fee reversals if a certain amount is spent annually. If you use a credit card to invest in NPS, you can earn higher rewards, reach your annual spending limit, and save on yearly credit card renewal fees.
• Can be used to avail tax benefits: In case you are falling short of cash at the end of a financial year but want to invest in NPS to save on tax. Then, a credit card comes in handy because you can use credit to invest and save taxes.

The following are the disadvantages of using a credit card for investments.

• Charges: Although investing in NPS with a credit card has its own benefits, the underlying charges for using a credit card are high. In such cases, if the benefits provided by credit cards do not outweigh the charges, then you are losing out on money. Let’s understand this with an example. The credit card charges for investing in NPS is 1%, and GST is 18%. If you invest Rs 100,000 annually, the annual charges are Rs 1,000, and GST is Rs 180. Hence, the total charges are Rs 1,180 per annum. If the benefits from the credit card aren’t higher than these charges, it is not worth investing in NPS through a credit card.
• Higher interest cost: If you cannot repay your NPS investment on time, the bank will charge you interest. This interest will range between 35%-40% per annum. From the above example, if you invest Rs 1 lakh and you are unable to repay this amount on time, then the bank will charge Rs 40,000 per annum as interest. This outweighs the tax benefits and returns you earn from NPS in the long run.
• Credit card limit: Every credit card comes with an upper limit for transactions. If you have already utilised a portion of your credit card for your expenses, you will not have enough balance left to invest in NPS.

Why Shouldn’t You Use a Credit Card to Invest?

Although using a credit card can seem quite convenient, it is important that you avoid using it during investment due to the high risks associated with it. Following are the risks of using a credit card for investments.

• Shows financial instability: Investing using a credit card can indicate a lack of financial stability. It is always best to use savings and excess funds for investment. If you use a credit card for investment, it will reflect in your credit history, which can impact your ability to take loans in the future. If you do not have savings, you can always wait until you saved enough to invest.
• Can trap you in a vicious debt cycle: If you invest using a credit card and the value of the investment falls, you won’t be able to pay back your debt on time. Banks will charge you interest for the overdue amount, and the interest will keep adding on until you repay all the dues along with interest.
• Increases your liability: Investing using a credit card will increase your financial burden. You might be using a credit card to invest because you do not have enough savings. If your income isn’t high enough to match your expenses, then it is better to refrain from investing until later. However, if you plan to invest, you must reduce your expenses, or your liabilities will increase, affecting your financial future.

Alternatives to Credit Card Investments

Investing using a credit card is a risky affair and has certain disadvantages. Hence, looking for alternative credit card sources for investment is important.

• Savings account: The good old practice of investing only when you have money is the best practice to follow. This is because it ensures you invest only when you have money and avoids the additional charges and financial burden of using a credit card.
• Take the SIP route: The saying ‘Every drop makes an ocean’ stands true to investments, too. If you invest even Rs 500 every month for a long period of time, you can accumulate a sizable amount of wealth. Through the SIP (Systematic Investment Plan) route, you can invest a small amount regularly to generate wealth over a period of time. This method also ensures you inculcate financial discipline and invest regularly.

Conclusion

Although using a credit card is very convenient for investing, there are certain risks attached to it. You can fall into a debt trap or pay additional charges for the transactions. Moreover, the interest costs are very high in the case of credit cards. Before opting for credit card investments, you must carefully analyse the benefits and risks and make an informed decision. However, it is always best to save money before you start investing rather than using a credit card.

Frequently Asked Questions

Can I use a credit card to invest?

Yes, you can use a credit card to invest in India. However, you can only invest in NPS or National Pension Scheme and physical gold using a credit card.

Can I take money from a credit card and invest?

Yes, you can borrow money from a credit card and invest. However, it is not advisable as the charges associated with cash withdrawal and investing through a credit card are high and outweigh the benefits of the investment itself.

Can I invest in NPS through a credit card?

You can invest in NPS using a credit card. However, you can only do it online on the PFRDA website. To invest through a credit card, log in to your NPS account and select ‘Transact Online’ followed by ‘Contribute Online’ tabs. During payment, choose the credit card option and pay your contribution.

Can I invest in SIP using a credit card?

You cannot invest in mutual fund SIP using your credit card, as the Securities and Exchange Board of India (SEBI) doesn’t allow you to do so.

Can I transfer money from a credit card to a bank account?

Yes, you can transfer money from a credit card to your bank account. It can be done through the bank’s ATM. However, transferring money is considered a cash withdrawal, and the applicable charges will be levied on the transaction.

Is it better to pay credit card dues or invest?

Credit cards charge an interest rate as high as 40% per annum, whereas investments in India give an average return of 15%-20% per annum. Since the interest cost is higher, it is better to repay the credit card dues than invest. Investing can wait until you repay your loans and dues.

Can I use a credit card to invest in stocks?

No, SEBI doesn’t allow investors to use credit cards to invest in stocks. Only net banking and UPI are the eligible payment modes for investing in stocks in India.