Credit card for IPOs? Explore the truth behind using plastic to invest in the market

Initial Public Offering (IPO) provides investors the opportunity to participate in the initial sale of a company’s shares. If you want to invest early in potentially high growth companies, it’s an attractive option which you can definitely consider. When it comes to the payment methods accepted for IPO applications, the use of credit cards is a common query. Let us understand in detail whether or not you can buy an IPO using a credit card.

Can you buy an IPO using a credit card?

The Securities and Exchange Board of India (SEBI) has set certain guidelines which must be followed while IPO applications. Unfortunately credit cards are not acceptable as a payment method for buying IPOs. However, you can buy an IPO by using the following payment methods:

ASBA: Application Supported by Blocked Amount (ASBA) allows you to block the amount meant for IPO application in your savings or current account until the allotment process is over.

UPI: Unified Payments Interface (UPI) has emerged as a favoured payment option for investors as it enables secure and real time payment authorisations through a linked bank account.

Credit cards are not suitable for payments as they do not involve debit from a bank account. You must also note that credit cards are borrowed funds and lenders make the payment on your behalf which you need to repay in the billing cycle. Therefore, applications for IPOs cannot be processed with credit cards.

Indirectly buying IPO through credit cards

Although you can not directly invest in an IPO through a credit card. Nevertheless, you can still indirectly use your credit card to buy an IPO:

Cash advance for investment: In order to apply for IPOs, you can withdraw cash from your credit card and transfer it to your bank account. However, it is an expensive option, as cash withdrawal fees and interest rates are extremely high.

Paying loan EMIs: If you are using a personal loan to finance your investment needs, credit cards can help you manage related expenses. However, you must ensure to make timely repayments in order to avoid financial strain.

Risks of using credit cards for investments

High interest rates: Due to the market being volatile, credit card interest rates can actually be greater than what you may be able to make on your potential investments.

Additional fees and charges: Cash advances for investments often come with extra fees and charges.

Credit score impact: Late repayments can damage your credit score and adversely impact your future borrowings.

No guaranteed returns: There is a high chance that you may lose money on your investments due to the uncertainty of the market. This way you may end up in debt and financial stress because of which paying your credit card bill may become difficult.

In conclusion, before you use credit cards for investing, you must understand that if you fail to repay even a single bill on time, your credit score will deteriorate significantly. You must also evaluate your finances as well as avoid exhausting your credit limit in order to maintain a low credit utilisation ratio.

This can help you build a healthy credit profile and improve your chances of future borrowings. Credit cards make you form a habit of spontaneous spending, hence, make sure to use the card wisely and only when really necessary.

(Note: Using a credit card carries its own set of risks)