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Bitcoin has been in and out of the news with each big spike and dip. Think you’re missing the boat?
It doesn’t make sense to go into debt to buy bitcoin on a credit card you afford to can’t pay off in full. But if you do your homework to figure out how the credit card issuer will process the transaction, you may be able to come out ahead in rewards value as long as you pay off your bill before you’re charged interest.
UPDATE: As of late January 2018, many credit card companies are processing digital currency transactions as cash advances or blocking cryptocurrency transactions altogether. This is a huge shift from when this article was originally published in December 2017, as it means much higher fees and immediate accrual of interest. Make sure you understand the fees before making a purchase.
First, let’s start with a quick overview of how buying bitcoin works.
Bitcoin is available on cryptocurrency exchange websites, where you can trade one currency for another. You could, for example, buy bitcoin (BTC) with U.S. dollars (USD) or another fiat currency, in the same way you’d exchange USD for euros at your local bank.
Many exchanges also allow you to trade for other forms of virtual currency, including:
When purchasing bitcoins, you’ll usually place a market order at the current exchange rate. Or, if you prefer, you can set up orders to buy and sell bitcoins when they hit a certain price.
Before finishing the transaction, you’ll have to complete some sort of verification process. The level of personal details required will depend on where you buy your bitcoin, where you live and how much you buy or transfer.
Once you’ve got your shiny new currency, you can store it in a bitcoin wallet with its own bitcoin address for transfers and payments. Or, if you’ve used an exchange like Coinbase, it can act like a bank for your cryptocurrency and place it in an account for you.
While some exchanges only allow direct payment methods like connecting a bank account or paying with PayPal, the most convenient ones accept other payment options, like credit/debit cards — and allow you to buy bitcoin instantly.
Here are some of the most popular exchanges:
Before you select any of these exchanges, however, do your research. With the rising popularity of bitcoin, some sites may try to scam you by taking your credit card information or stealing your cryptocurrency.
If you’re committed to buying bitcoin with plastic but aren’t prepared to face the fees and interest rates associated with a credit card cash advance, you can probably use a debit card in most of the same places.
You’ll almost certainly still pay certain fees because you’re using a card, but because the funds are actually in your bank account, you won’t have to pay interest or a cash advance fee. Using a debit card also helps reduce the risk of long-lasting debt.
When deciding whether to buy bitcoin via credit card purchase, there are a few things you should consider.
First, think about how much of your available credit you’ll be using.
The percentage of your credit limits you’re using — known as your credit utilization ratio — is a major factor in calculating your credit scores. Generally, the more available credit you use, the lower your scores will be.
So if you max out your credit card to buy bitcoin, that could negatively impact your credit scores.
Though your scores will bounce back once you pay off that debt, you shouldn’t significantly reduce your available credit if you’re soon applying for a new credit card, auto loan or mortgage.
When you buy something in a store, the retailer has already included credit card processing fees into its prices.
But when you buy bitcoin, you’ll have to expect several percentage points to be tacked onto your purchase.
Want to mitigate those fees? Purchase bitcoin with a bank transfer instead of a credit card.
If you use an American credit card to buy bitcoin on an exchange based outside the United States, your card issuer may charge a foreign transaction fee.
Though this fee usually equates to around 3 percent, it’s easy to avoid by using a card without foreign transaction fees.
In early 2018, Visa and Mastercard started classifying cryptocurrency purchases as cash advances. And Chase, for example, recently settled a lawsuit over the definition of “cash-like transactions” after it began processing cryptocurrency purchases as cash advances.
Not only did this mean higher fees, it meant interest would start accruing immediately. For the most part, it also prevents you from earning rewards on your bitcoin purchase.
Before purchasing bitcoins, research your exchange and credit card to find out whether your purchase will be categorized as a cash advance. If it will, you might want to consider a bank transfer instead.
Bitcoin and other cryptocurrencies are highly volatile. If you buy bitcoin with money you don’t have — and the price drops dramatically — you could find yourself up that famous creek without a paddle.
We’d advise against buying bitcoin on a credit card unless you can pay it off in full that same month. If you’re using a credit card to get rewards, fine; if you’re using a credit card because you can’t afford the bitcoin, you should wait until you can.
As with most purchases, the biggest advantage of buying bitcoins with a credit card is the ability to earn rewards. Just be sure your purchase isn’t categorized as a cash advance — if it is, you probably won’t earn rewards.
The other (riskier) reason people buy bitcoin with a credit card is financial leverage. If your bitcoin buy is treated as a purchase (rather than a cash advance), a credit card lets you use large credit lines to potentially profit from major price swings.
If that’s your motivation for buying bitcoin with a credit card, be careful: Spending more than you can afford could land you in massive credit card debt.
Unfortunately, there aren’t any credit cards (yet!) that offer additional rewards for buying bitcoin or other cryptocurrencies.
So if you’re planning to buy a significant amount of bitcoin — and you have excellent credit — applying for a new credit card could earn you a signup bonus in addition to rewards from the spend itself. If you time it right, you could even come out ahead in rewards value!
It’s important to note, however, that cash advance transactions don’t usually count toward introductory bonuses. So if your credit card issuer treats cryptocurrency purchases as a cash advance, you’ll likely miss out on those rewards.
The aforementioned credit utilization ratio is another reason you might want to consider opening a new credit card.
Here’s why: Since opening a new card increases your available credit, spending a lot on bitcoin won’t have as big an impact on your credit scores. (Alternatively, you could ask for a credit limit increase instead of opening a new card.)
If you’ve decided to apply for a new card to buy bitcoin, look for one that will fit your spending needs and provide you with benefits even after you’ve gotten your introductory bonus. For example, you might open a travel rewards card that will earn you points toward flights or hotel stays.
Though buying bitcoins with a credit card can be a smart move, think carefully before diving into the cryptocurrency craze. It may be an exciting industry, but it’s also unpredictable — and certainly isn’t worth going into debt over.
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