Investing in bonds can be a great way to diversify your financial portfolio and provides a low-risk way to earn a bit of money back on your investment.
Understandably, understanding the ins and outs of the bond market may feel a bit tricky, including the question of how to pay for a bond. If you don’t have disposable cash, you may be looking to your credit card as a possible way to purchase bonds. Unfortunately, there’s no direct way to pay with your credit card, yet there are ways in which you can utilize aspects of your card to do so.
To start, here’s a short history of buying bonds with credit cards and the types of bonds available today.
A short history of paying for bonds with credit cards
There was a time when buying a savings bond with a credit card was fairly easy. In fact, in 1999, the United States Department of the Treasury set up an online storefront named Savings Bond Connection, later replaced by Savings Bonds Direct in late 2000, that allowed for bond purchases with credit cards.
Being able to buy bonds with a credit card allowed customers the possibility to earn even more back on their purchase if they used a rewards card, for example. Unfortunately, the site was discontinued on December 30, 2003, and, as of today, the Treasury Department only allows payment via a checking or savings account.
Types of bonds available
When researching how to invest in bonds, it’s important to consider the types available to you.
Generally speaking, there are two kinds of bonds — government bonds and corporate bonds. You’re more likely to receive a fixed-rate bond (meaning you pay the same amount in interest over a period of time), but its possible you could receive a floating-rate bond. In this case, interest is subject to change over time based on outside forces.
Here are some of the main options for bonds you may encounter.
National bonds, also known as government or sovereign bonds, are considered low-risk investments because they are backed by the government. As long as the government is stable, these bonds present little risk of loss. The government sells these bonds to help fund projects and its daily operations.
A government bond will have an interest payout after a specified period of time, and because government bonds are low risk, they don’t offer high-interest payouts. Instead, you’ll see a consistent stream of interest income.
Premium savings bonds
Premium savings bonds are digitally issued through the U.S. Treasury Department. Because savings bonds are backed by the federal government, their value remains stable despite fluctuations in the market.
Just as they won’t lose value with the market, they also won’t see soaring interest earnings, either. Instead, you’ll earn a small percentage of interest on your investment over a specific timeframe. U.S. savings bonds are subject to federal taxes, but not to local or state taxes.
Treasury bonds, or T-bonds, are a kind of fixed-rate government bond that can be purchased from online auctions held by the U.S. Treasury Department. These bonds are low-risk, and for that reason their interest yield is also fairly low.
Treasury bonds offer a stable yield because of their government backing and are taxed at a federal level. Typically, these bonds have a maturity range of 10 to 30 years.
City bonds, also known as municipal bonds or “munis,” are government-backed bonds issued by a state or local government. The money raised by these bonds can fund community projects and, much like other kinds of government bonds, are considered low risk.
Another perk to a city bond is that its return is federally tax-exempt and in some cases local and state tax-exempt.
Using credit cards to buy bonds
You may be considering using a credit card to buy bonds, yet seeing as this payment method is no longer accepted by the U.S. government, you’ll need to turn to different options.
That said, there are a couple of workarounds that allow you to leverage your credit card to invest in bonds.
Alternative ways to buy bonds using a credit card
While using a credit card to directly purchase bonds isn’t possible, there are ways to indirectly use your credit card to fund the purchase.
For starters, you can use your credit card to request a cash advance and then use said cash advance to buy a bond. Before you use this method, however, it is very important to read the fine print about cash advances for your card.
Typically, cash advances have a two-to-four percent fee per transaction. They may also have a minimum transaction fee. On top of this, cash advances usually have a higher interest rate than your purchase APR and begin to accumulate interest immediately. It’s not advisable to go this route unless you will be able to pay off the cash advance by your next billing cycle. If not, you will likely pay more for the bond than you will potentially earn.
Another option is to invest your cash back earnings. You can request that your cash back rewards be deposited into your bank account and then use that money to invest. While it may take a bit longer to earn enough cash back to buy a bond, you won’t have to worry about paying anything back.
The bottom line
Though using an alternative route to indirectly purchase a bond your credit card may be tempting, it could also lead to high interest rates and the accumulation of debt. Whether you are investing in bonds or opening a CD, the most fruitful route is using your bank account to make your purchase.
— to www.bankrate.com