Why Has SEBI Disallowed the Use of Credit Cards for Paying Investment Amount

23 Jan 2020

Credit cards have transformed the way you process your payments by providing an extra feather in your financial appetite. But what difference does it makes when it comes to investments?

Credit cards have gained wide popularity in the recent times. The eligibility criteria for getting a credit card has also been eased up by the banks which has led to a steep increase in the number of credit card users. Credit card allows you to pay for a product or service even if you are not having the required amount with you in hard cash.

Credit card is nothing but a form of short-term debt which helps you to manage your expenses for a month and then settle the whole amount incurred in single go at the end of the monthly billing cycle. If for some reasons the bill gets overdue, the card issuing bank charges certain interest on the overdue amount.

Credit card and investments

Investment as we all know are subject to market risks and volatility. The returns are not guaranteed and there are chances of loss too. Credit card as discussed are nothing but a liability. Using the amount from credit card for investment purposes can turn out to be disastrous in case of a loss. The amount used from the card is actually a debt that you own to the card issuer.

In case of a loss, you need to bear the loss and at the same time pay back the amount used from the card to the card issuer. In case your payment gets delayed, there are hefty interest rates of around 18% depending on the card issuer, which are charged on the overdue amount. Delayed payments also affect your CIBIL score adversely which can eventually create troubles for you in getting a loan from any of the banks.

SEBI against investment on Credit cards

SEBI has strictly banned the use of credit cards for all sort of investment purposes. Investment should always be done using the surplus amount you have from your income so that in case of a loss you don’t end up in a debt.

There are close to 49 million credit card users in India out of which nearly 80% are unable to pay off their dues on time. Credit card gives you to power to spend, but any unplanned expenditure can lead to huge financial debts. Credit card debt was a key factor behind the American recession. The primary goal for all credit card holders should be to pay off the debt as soon as possible which is usually not feasible with investments.

Case Study

Let’s take a scenario, Mr. Singh is working with a leading MNC and earning decent amount of salary. He got married recently which took all of his savings. A close friend of Mr. Singh advised him to invest in the stock market to balance this expense. Mr. Singh who has hardly any surplus fund left with him decided to use his credit cards for buying some stocks. His portfolio started yielding positive results for few days which boosted his confidence to invest more from his card, until the markets crashed. Mr. Singh incurred losses on his portfolio.

Now apart from the loss he incurred he is left with a huge debt to his bank because he was actually investing on his credit card which is nothing but a type of short-term debt.

If he had used his own savings for the investment purpose there won’t be any liability on him today even after the loss.

Now to pay his Credit card bill Mr. Singh has to opt for a personal loan at very high interest rate of 21% which has affected his financial balance.

The aftermath of this complete scenario is that credit card is nothing but a type of debt. It is good to use card for your day to day expenses because it reduces your dependability on your pay day. But it is not at all a good idea to use your card for investments. All sort of investments are subject to market risk.

The use of credit card should be very well planned because swiping a card at any POS is a very easy task but paying off the credit card bill is very challenging. If the card is used for any sort of investment purpose which does not turns out to be fruitful, the card holder ends up in severe financial crisis. In stock market, your investment is always at risk.

Therefore, it is mandatory to have a risk profile analysis before entering the investment markets. Your investment advisor will adhere to your risk profile before providing you any trade. is always sensible to invest only a surplus amount of your income in the markets so that in case of a loss, your financial balance is not disturbed.

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