Credit card checks for stockmarket?
September 3, 2006 5:56 PM   Subscribe

I got a few credit card checks with 2% APR until April 07. Should I use them to invest in the stock market?

Hi, I'm a poor student, and I have always been interested in the stock market. Should I mail a check for $1000-2500 with 2% APR until April 07 to my empty TDAmeritrade account, buy some stock and hopefully repay the money by April? I know I wouldn't make a lot of money, and possibly even lose some, but it seems like a fun thing to do :)

Thank You!
posted by monkeycool to Work & Money (38 answers total) 1 user marked this as a favorite
Major mistake.

Gambling with someone else's money carries much too great a risk of disaster.
posted by Steven C. Den Beste at 5:59 PM on September 3, 2006

No. Terrible idea. As outlined by those above. If you can find a CD that expires before April 07 with a higher rate of return do that, but the difference is probably so minimal it would not be worth your time.
posted by geoff. at 6:01 PM on September 3, 2006

What happens when you lose it all and the interest rate skyrockets in April? How will you pay off the debt?
posted by aneel at 6:02 PM on September 3, 2006

Another vote for "no." Even in the best case scenario of getting lucky in a short run of investing (unlikely, investments usually take longer than 7-8 months to bear fruit), the "transaction fees" on both ends (the stock trading end and the credit card end) will eat up any returns.

Aside re debt & low-interest cards. If you had debt that was higher than 2 percent, you might want to switch your debt to a 2 percent offer. But 2 percent to April 2007 is not very long -- especially as the fine print probably includes a "transaction fee" (look closely) of X dollars per $100 dollars in cash. If you have good credit, you will be offered "life of the loan" fixed rates that will be better than 2 percent for 7-8 months.
posted by ClaudiaCenter at 6:09 PM on September 3, 2006

Baaaaad idea.
posted by evariste at 6:19 PM on September 3, 2006

Best answer: If your opinion of the market is that it will be up more than 3% by then, I would buy "the market" either the DIA or QQQQ or another ETF (Exchange Traded Fund) that tracks a segment of the overall market. If you're right, you could make some good returns. If you are wrong you'll be out about 10% or $200. YMMV of course.

Those who are afraind of using OPM (other people's money) will never be willing to take the necessary risk to achieve outsized rewards. If you are a conservative person then go ahead and do nothing. If you are at a point in your life where you can afford some risk then do it. If nothing else, I guarantee you will learn more in the market than any other class you take and at a total loss of $2000 it is still about the same as paying for a class credit.

Man up and roll the dice.
posted by JohnnyGunn at 6:20 PM on September 3, 2006

Best answer: The (other) problem with doing this is that if you do a 2% or 0% balance transfer on a credit card, you still have to make minimum payments every month. Which means wherever the money goes has to be fairly liquid (or you have to have other money to rely on). Also, if you're a day late with anything or otherwise violate terms, the rate will likely go up to the normal rate -- 18% or higher, likely. So you need to be able to pay off the entire balance when that happens if that happens.

There are people who borrow money at low rates (more usually 0%, but 2% could work) and stick the money into high-yield online savings accounts (which typically yield 5% to 6%). But it's not much worth it until your credit is good enough to borrow on the order of $50,000+ this way (not all from one company). If you're interested, read the Fatwallet finance forums. But it takes discipline, and you have to learn how to build up your credit first. (Which isn't as hard as it sounds -- it can largely be gamed.)
posted by raf at 6:38 PM on September 3, 2006 [3 favorites]

Buying stock on margin, using OPM etc. - OK this is the kind of risk that made the stock market crash of 1929 so traumatic. However, if you can stomach the risk, yeah, go for it. A loan used for investment is also tax deductible - the government encourages this risky behavior. You might want to check with your accountant or other source to find out what you need to do to make sure this loan is considered an investment loan. I don't know the rules here as I am too risk averse for such a play. Perhaps you need a more dedicated loan where the securities themselves are collateral for the loan to qualify for the deduction.
posted by caddis at 6:40 PM on September 3, 2006

Also, if you use a check to make this purchase, be aware that many credit cards charge as much as 3% of the check amount as a "convenience fee". So you end up paying much, much more than you thought.

Use these credit cards to transfer a higher-rate balance. If you don't have a higher-rate balance, use them to buy some furniture or something else you can have paid off by April. Otherwise, don't use 'em.
posted by MeetMegan at 6:41 PM on September 3, 2006

Just in case you haven't read the fine print: When you pay your credit card bill, your payment is applied to the amount with the lowest interest first.

For example:

You write the check for $2000. You also have $500 in purchases on the card. The interest rate for purchases is, let's say, 15%.

At the end of the month, you pay $500. This payment is applied to the $2000 so now you have only $1500 at 2% and $500 at 15%.

So you are only actually borrowing the money at 2% if the card has a zero balance when you write the check and you don't charge anything else to the card until the $2000 is paid off. And that might not even work -- I've seen offers where you only get the low interest rate on the cash advance if you make purchases every month.
posted by winston at 6:43 PM on September 3, 2006

The stock market is not the place to look for short term gains (unless you like gambling). If you're willing to invest over decades, the stock market has proven returns. For a short period, investing in a CD or high yield savings account is better.
posted by knave at 7:04 PM on September 3, 2006

Response by poster: Wow, thanks for all the replies. I'm going to sleep on it, but I think I'll do it. Not really because I might be able to make some money, but mainly to learn how to play the market.

@winston: Thanks for pointing this out, but I made sure I paid it off completely. (I even gave them a few extra bucks just in case :)

@raf: I didn't think about the minimum payments, I'll look in to this, thank you.
posted by monkeycool at 7:18 PM on September 3, 2006

I would have to 45th the 'don't do it' proposition.

Any stock book you'll ever read will tell you never to invest with others money.
posted by savagecorp at 7:24 PM on September 3, 2006

Any stock book you'll ever read will tell you never to invest with others money.

Patently untrue. Buying on margin is done all the time and has yielded smart/lucky investors plenty of profit. Just because you don't know how or are unwilling to take the risk doesn't make it a bad idea. It simply means that YOU aren't willing to do it.
posted by SeizeTheDay at 7:32 PM on September 3, 2006

Cash advance checks are not the same as regular purchases. You'll probably be charged interest at 22%, not 2% (check your terms to be sure). Plus the "convenience fee" MeetMegan mentioned.

Your best bet is to buy bonds or CDs in a way that charges your card and doesn't cause any fees (on your card or otherwise (brokerage)).

If you're crazy enough to do this, get a card with a nice cash back rate with however you're purchasing the CDs. The Fat Wallet Finance forums probably can help you out. You'd be much better off cycling through "0% APR for 6 months" cards.
posted by easyasy3k at 7:37 PM on September 3, 2006

Wow, you guys are incredibly conservative with investing. (I guess in action I am too, but in theory I would take more risk if I had the time to research and watch my investments more closely.) In any event, stock loans are not uncommon and not outrageously dangerous depending upon the beta of the stock, the margin etc. Guys like Trump didn't get to be wealthy investing just their own money. They used daddy's money and more importantly the bank's money. They also spent 100% of their time studying the market into which they were investing so as to know it very, very well. Trading with other people's money may or may not be right in this situation, but it is not the dire dilemma portrayed by everyone here. If you make $50K a year and put $1k at risk in this fashion it won't kill you if you lose it and you might make a tidy profit. Of course you could just go to Vegas. On the other hand if you make $20K a year and put $5K at risk and then lose it, this would be bad. Everything in moderation. (which again for me means not using OPM to invest) One very common and perhaps even smart area to use stock loans is with ISO stock options. If the stock has significantly appreciated and is likely to continue that trend then exercise your options, take a loan and hold the stock for at least a year to minimize your taxes. This is a complex play which should involve a good tax advisor. However, I use it to illustrate how in some instances the risk is low compared to the reward for a stock loan.
posted by caddis at 7:46 PM on September 3, 2006 [1 favorite]

Wow, thanks for all the replies. I'm going to sleep on it, but I think I'll do it.

Whaaaaaa? After all the replies saying "Don't do it", to which I will add my don't do it, you're still thinking about it?

I know I wouldn't make a lot of money, and possibly even lose some, but it seems like a fun thing to do :)

Yeah, being $2000 in debt with no real guarantee that you'll be liquid enough to get out of that debt before the intro interest rate expires sounds like a real blast.

Dude. Seriously. Think twice, thrice or more before actually doing this.
posted by pdb at 7:46 PM on September 3, 2006

Terrible, horrible, no good, very bad idea.

Don't do it.
posted by EarBucket at 8:07 PM on September 3, 2006

I don't think it's necessarily the whole "don't invest with other people's money" that should scare you so much as the much riskier "don't invest with the credit card company's money." Credit cards have all sorts of nasty little side effects and traps built in; that's the tradeoff you get for the convenience of borrowing money so easily.

Note that taking out a loan to, say, finance a small business is a perfectly acceptable practice, while using credit cards to do the same thing is perceived as a scary proposition. This is not all that dissimilar to the situation you're contemplating.
posted by chrominance at 8:54 PM on September 3, 2006

I don't think trading with only $1000-$2500 is worth it. TDAmeritrade is $10 per transaction. So at the low end that's a 1% fee to buy and a 1% fee to sell -- another 2% on top of the 2% borrowing cost.

Also, the April 2007 hard deadline might be very unpleasant. If the stock has dropped, you won't be able to wait it out. You'll have to sell at a loss, even though you might be 100% confident it will go back up.

Finally, consider that those who are suggesting you do this are themselves investing with OPM. Yours.
posted by smackfu at 8:55 PM on September 3, 2006

Basically, it's a rookie mistake to play the market with scared money, and what you have is very likely scared money, considering your self-description as a poor student. If you are prepared to pay the money back in April come what may, then go for it. If you are not, then don't.
posted by evariste at 9:12 PM on September 3, 2006

If you want to have fun playing the market, who says you have to risk real money to do it, anyway? There are plenty of online fantasy stock markets. When I was a teenager in Jordan with no internet, I used to play the market with a fictional account, trading once a day based on the closing quotes in the Financial Times at the British Council library. I did the whole thing with pen and paper in a notebook for years, tallying up my profits and losses and deciding what to sell and what to buy.

Think creatively here! You have a $2500 check that will cost you 2% a year if you cash it, and you must pay it back by April, 2007. What can you invest in that's tangible, that will make you a nice profit for your time? What if you use it to buy tools and start a small business? Ideas: maid service, moving service, landscaping, a roving espresso and lunch sandwiches cart at your school or neighborhood.

I can guarantee that if you do something like that and lose all your money, you will gain a lot more real-life lessons about business in the real world than you will from speculating in the stock market. And your chances for making a mint are much, much higher.
posted by evariste at 9:19 PM on September 3, 2006

Best answer: I say go for it - not because you'll make money, you almost certainly won't. But you'll learn extremely concrete lessons about the nature of fees and interest. Keep absolutely detailed records of all transactions and next May figure out exactly where you ended up and why - I'm sure it will be very instructive. As long as you invest intelligently you will probably only lose a few hundred dollars. I mean, how many thousands do you pay your college every year to learn shit? And if you come out ahead, come back and post to Metatalk and tell all us haters to suck it. Ooh, beter yet make this a project and blog the whole thing, so we can mock you ahem rather admire your financial acumen in real time.
posted by nanojath at 10:00 PM on September 3, 2006

The poster identifies himself as "a poor student." So if this turns out badly, there probably isn't much to fall back on, unless Mom & Dad are there to pick up the pieces, or something like that. Outside of that, there is a difference between 'investing' and 'gambling', and it sounds like stock market gambling is really what he wants to try. When gambling, the rule of thumb is always 'don't gamble with money you can't afford to lose.' Can you afford to lose $2,000? Then go for it. People blow $2k on far stupider things every day -- may as well take your best shot while you're young and relatively carefree. As to this being a good approach towards general investing -- Uh, no.
posted by spilon at 10:41 PM on September 3, 2006

Think about it in another way: the purpose of short-term speculators is to create liquidity in the market. That is why they are useful and their occasionally destabilizing effects tolerated. Your little $2.5k check does not create any appreciable liquidity in a market that turns over trillions daily. What use is this to society?

Let's say you double your money in the stock market. You have met no one, you have made no contacts, have gained no experience in any useful skill.

If you start a small business, you are creating new economic activity and wealth directly in your community. You may even have success to the extent that you're creating jobs and hiring people. You will gain many new skills, from inventory management to accounting to dealing with employees to sales...

You will also meet people in the line of business who may be useful to you for the rest of your life. People who will admire your pluck as a student who has started a business, and want to help you in life if they can. Even if it's a moneyloser, you will be better equipped with lessons learned for your next leap into the unknown.
posted by evariste at 10:50 PM on September 3, 2006

The short deadline makes this extra stupid from a tax point of view (that's even assuming you make money). There is a quite a tax break on selling something you've held at least 1 year as opposed to less than 1 year.
posted by Riemann at 11:14 PM on September 3, 2006

This isn't quite the stupid idea that some are saying it is (though your definition of a "poor student" as someone who's happy to potentially lose a few grand isn't the same as mine). The best idea is to simulate it for six months. Work out the fees you'd pay on the che(que)cks, the minimum monthly repayments and the brokerage charges. Then see what level of increase in share price that means you'd need to see to break even. Pick your stocks or ETF and monitor carefully for six months. At the end of six months decide whether it would have been worthwhile and then make a real-money decision (and note that those immediately preceding six months have no predictive power over the following six months).
posted by patricio at 6:40 AM on September 4, 2006

Response by poster: @nanojath: Great idea! I'll blog it. I will register a new domain, and document my experience.

I guess this will no longer be about the money, but about learning. If I lose a few hundred, or even all of it and if I document it on the web for others to see, it will be worth it. What do you all think about the blog thing, and do you have any suggestions on a good domain name?
posted by monkeycool at 8:00 AM on September 4, 2006

Best answer: No offense, man. But you are a self-proclaimed "poor" college student who is essentially engaging in a dangerous game. IMHO, you'd have better luck hitting the poker tables than to actually make a profit with this cash in 8 months. Given that you (and I'm assuming this) have no financial skills available, nor can you see the future, you're basically pissing away your credit and endangering yourself needlessly for the foreseeable future (credit collection agencies are no picnic to deal with).

I could understand if you had a business plan or had insider knowledge (illegal, but done all the time). I could understand if there was a bank willing to give you so much interest as to make this transaction worthwhile. But given what you've told us, you got nothing except an affinity for huge risk with little chance for reward. And the fact that you want to document this online tells me that you think you could make money on this "journey", which again I doubt.

My opinion: quit trying to act like a rock star, finish college, and then piss away your salary on hookers and pot.
posted by SeizeTheDay at 9:42 AM on September 4, 2006

Consider this: you have a 2% interest rate until April (about 7 months), and a 3% cash advance fee for writing that check. Over that 7 months, that would amount to about a 7% "real" interest rate.

Plus, if your investments are not all ripe and juicy before April, you'll start paying a rate I would assume is closer to 20%. You wouldn't have to do that long to obviate any stock gains you've made.

In other words, unless you have some specific insight into the stock market that other investors lack, it would be hard to make this pay off.
posted by curtm at 10:04 AM on September 4, 2006

I guess this will no longer be about the money, but about learning.

Then DON'T DO IT WITH REAL MONEY. Do as patricio suggests - simulate it. Play it like fantasy football; "invest" $2k of imaginary money (including fees) and track it, trade it, whatever - just don't use actual cash. Blog about it from that point of view.

If I lose a few hundred, or even all of it and if I document it on the web for others to see, it will be worth it.

Um, no, it won't. If you lose all of it, you'll not only be out $2000, but you'll also have to pay back the CC company that same $2000 (plus interest) that you will suddenly no longer have - and the day that intro interest rate expires, the rate will rocket back up so fast your head will spin. You're heading towards a world of financial hurt that will take YEARS to recover from.
posted by pdb at 10:06 AM on September 4, 2006

Be careful about these low interest offers. As Raf alluded, there was a new banking law enacted last October that allows for a practice called "universal default." This means that a credit card company can instantly increase your interest rate -- 25%, 30%, no limit -- if you are late on any payment, be it a car payment, phone bill, utility bill or school loan.
posted by JackFlash at 10:39 AM on September 4, 2006

Response by poster: Ok, this is what I'll do: I have a research paper that I need to write for my comp 2 class. I'll write a paper on investing on credit for short term gain. After that I should know if it would have been a good idea or not. So, to all the mefites who helped me with this, thank you! I might do it, but not until after I've done my research.
posted by monkeycool at 10:44 AM on September 4, 2006

I really don't understand advice to just "play the market" and that losing money is some sort of valuable investment lesson. That's ridiculous, unless one is talking about some sort of aversion therapy for ill-advised speculation. You can learn everything you need to know about investments, fees and taxes through reading and study before you ever put a dollar at risk.
posted by JackFlash at 11:01 AM on September 4, 2006

I'm a poor student, and I have always been interested in the stock market. ...

I've been in the markets for over twenty years. I'm afraid the excitement/glamour of stocks and commodities is waaaaay overrated.

If you are a poor student, I would recommend building capital (i.e. saving) and not looking for short-term gains in the market.

I remember as a fresh-faced investor, I thought of the market as a cash cow just waiting to be milked. But i held off until I had over $20K in assets before even getting involved. With diversified investing, I could grow my assets while at the same time learning about the markets. At no time (even today) did i have more than 10% in short-term market trading positions.

But he reason for waiting though is not because you'll win or lose money. The reason is that jumping into the market like this is not a financial plan, it's gambling plain and simple.

If you lose, what do you do with the next $2000 you get? Put that into the market also?

If you win, where do you go from there? Double up?

This is not the road to wealth. Because true wealth comes more from planning than luck.
posted by storybored at 11:45 AM on September 4, 2006

posted by JamesMessick at 6:47 PM on September 4, 2006

While I don't think this is the smartest idea, some of the responses make it seem like you're at risk of losing the entire $2000 which, unless you are completely incompetent, is probably not going to happen. At most you may lose a few hundred bucks. Sticking it in a money market account will net you less than $100 which, IMHO, isn't really worth waiting 6 months for. If you're looking to have "fun", take it to Vegas and heed Wesley Snipes advice from Passenger 57: always bet on black.
posted by peruvianidol at 2:47 PM on September 5, 2006

I know there's a calculation somewhere that addresses risk. In all these sorts of schemes risk is what people fail to include in the equation. I don't think anyone is going to talk you out of it but you should be aware of all the angles. Credit card companies are about the worst place, short of organized crime, to get money for this sort of thing. But what the hell, if you screw it all up there's always bankruptcy, right? It's the American way.
posted by friarjohn at 2:57 PM on September 5, 2006

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