Why Traders Use Credit Cards In Forex
Why have traders been using their Credit Cards as the primary payment method to fund their trading accounts? The answer is simple, and it’s a convenience thing. However, recently paying with your Credit Card (CC) for investing in the Forex and other speculative markets has become illegal in the U.S and is a crime the FBI has started to crack down. In other parts of the world, traders use this payment method because again it offers convenience and access to larger investment capital (due to the credit/ loan).
Today traders are overwhelmed with a variety of account funding options offered by the Forex Brokers. The initial deposit options by their broker depend on their client’s personal preferences, locations, etc., with the most popular method being Credit Card deposits, Bank wire transfers or by using alternative Payment Services Providers (PSPs). Credit Card payments are widespread, using them traders fund their accounts either directly by entering their CC information on the broker’s deposit page, or by depositing first into their PSP wallet or account and then transferring those funds to the brokerage.
Why Forex Traders Use Credit Cards
Here are the main reasons people prefer using Credit Cards to deposit funds into their accounts.
First and foremost, it is a significant convenience factor due to the sped of deposits and withdrawals – traders simply just log in to the Forex accounts, input their CC data, and the transfer of funds usually processes on the same business day or only a few hours.
Another main reason is due to insufficient cash on hand – some traders may not have a particular amount they would like to invest with, which they intend to use as a deposit. In most cases, this acts as a cash transaction and may even be taken out as a cash advance from the Banking Institution. The concept of borrowing money from the bank to invest with is not new; businesses do it, and people in the real estate markets do it all the time.
Risks Of Using Credit Cards
Forex Brokers are happy with credit transactions because it helps them obtain more clients, but you should know that using Credit Cards in Forex and other highly speculative markets adds even more risk in an already incredibly high-risk investment. Again, Credit Cards are a form of borrowing, and when you take into account the cannonade of fees and the average annual interest rate (15-19%), which credit card holders are charged, this raises a major concern. Are the traders annualized returns from trading activities substantial enough to cover all the expenses on his or her credit card, let alone to make a living? Truth be told, credit card interest accrues daily, take your interest rate and divide it by 365.25 to find out what daily interest you are charged and if your profits for the month will be enough to cover your next monthly cc payment.
- For example, say you deposit USD 10,000 into your brokerage account, and your interest rate is 17%.
- 17 divided by 365.25 equals 0.0465
- 10,000 x 0.0465 equals $465.43
That’s not your monthly payment that’s just how much interest you’ll be paying that month, so you’re looking at paying $5,585.16 in interest per year. To get the card paid off in 36 months, you’ll need to pay at least $742.43 each month, and you will be paying a total of $16,755.48 in interest payments. Now add the original $10,000 that you borrowed and in 3 years you will have paid back $26,755.48, so you would need to profit that much just to break even and make your money back. It’s certainly possible, but it’s a lot of unnecessary added stress.