Thinking about buying Bitcoin? Don’t buy on credit. For a year now, cryptocurrency exchanges have been warning their customers that using credit cards to buy Bitcoin can come with steep fees. Not only will cryptocurrency exchanges charge higher fees (often because credit cards simply charge higher transaction fees to merchants), but also because credit card companies will take a huge chunk out of your transaction as well.
Many cryptocurrency exchanges no longer allow you to buy Bitcoin with a credit card at all, and that’s because so many credit card companies have barred Bitcoin purchases, including Citigroup, Bank of America, Chase, TD Bank, Virgin Money, and Lloyds Banking Group.
Why shouldn’t you be buying Bitcoin with a credit card?
#1 Credit Card Companies Now Treat Crypto Exchange Deposits as Cash Advances
One of the major changes that happened last year was that credit card issuers changed the MCCs (merchant category codes) for digital currency purchases. The new code means that banks and card issuers are able to charge additional fees: namely, cash advance fees.
These are not fees charged by your cryptocurrency exchange, but by your credit card issuer. MCCs are used to distinguish between one type of vendor and another, i.e., a hotel vs. a gas station. Changing the MCC for digital currencies means that now credit card companies can charge cash advance fees and interest rates, which could be much higher than your usual credit card fees.
For example, on cash advances, some popular Visa cards charge either $10 or 5% of the transaction, which is ever higher. On top of that, the annual interest rate is over 26%, compared to an average of 16 to 25% for other purchases. Simply put, it’s too expensive to buy cryptocurrency with credit card.
#2 Going into Debt to Invest is Not a Great Idea.
The other reason you should avoid the practice is that borrowing to invest can be a very bad idea. If the investments take a downturn, you could wind up owing a lot of money with no way to pay for it. The fear of bankruptcies and foreclosures in the Bitcoin bubble ignited the trend in credit card companies issuing cash advance fees.
It’s also just not a good idea for yourself. Given Bitcoin’s price volatility, you shouldn’t be spending money that you don’t have. Bitcoin can be a very useful tool for businesses or individuals looking to make online purchases or pay contractors. It can also be a great investment if you’re looking for a high-risk, high-reward investment.
What are the alternatives to using a credit card to buy Bitcoin?
A year ago, it was much harder to buy Bitcoin without a credit card. Today, cryptocurrency exchanges like Bitbuy have made it possible to buy cryptocurrency with your debit card using an eTransfer. The fees are lower, but the exchange does need to have good relationships with the banking system. You can check out this post to learn more about transferring money directly from your bank account to a cryptocurrency exchange.
There are other ways to buy Bitcoin as well, including Wire Transfer and Flexepin accepted by cryptocurrency exchanges. Before you start buying Bitcoin, do your research into low-fee cryptocurrency exchanges and payment methods.