About 60 million credit cards are stuffed into the wallets and purses of UK consumers. Meanwhile, about one in four Brits takes out a personal loan each year. It’s clear, then, that both are common and popular ways to get access to finance. But how do you know which is best for you?
If you’re eyeing up both potential avenues, here’s what you need to consider:
Credit cards: The pros and cons
Credit cards are used in a few different ways. They are great for consumers who want to make a purchase in a store or online and defer that payment until later in the month. So, for example, you could pop the cost of that too-good-to-miss bargain new television ‘on the plastic’ and then transfer the money from your current account on payday.
They also often come with interest free periods at the start. Say, therefore, you purchase a £2,500 holiday on a credit card with a 24-month interest free period – you could pay just over £100 a month and clear this without accruing a penny of interest.
Credit cards also, as The Mirror points out, offer a low cost way of transferring funds into your account.
On the flip side you need to consider the fact that once the ‘honeymoon’ interest free period ends, interest rates can be higher than other forms of finance. Once this ends you will be told the minimum amount you must pay each month, but falling into the trap of just paying this will barely chip away at the total debt.
Because they have a spending ‘limit’, it’s easy to keep adding to the amount you owe, with extra purchases. It’s also unlikely that a credit card will allow you to spend more than about £5,000 – making it unsuitable for some of the more expensive purchases you’ll need to make.
Loans: The pros and cons
Loans, on the other hand, can typically provide you with access of up to £25,000 – the sort of money you need to be able to extend your house, bail you out in an emergency or consolidate your debts if you’re in big trouble.
With a huge number of lenders in the market, you can shop around and get a pretty low interest rate too and agree to make your payments over a period of time that suits you, rather than rushing to complete your repayments in a relatively short interest free period.
It’s also worth noting, as Avant Credit does, that paying off an installment loan in full and on time will help with building credit to deliver you a better rating in the future. Credit cards can help with that too – but with changing minimum payments and the potential to spend more they can be harder to manage.
The negatives are, in essence, the strengths of the credit card. There is no interest free period and not the same benefit for money transfer. Plus, you don’t have a ‘limit’ to spend up to, once it’s gone, it’s gone.
In short, smaller short-term spending is probably better on a credit card whereas a medium-to-long-term plan to pay off a bigger figure is best achieved through a loan.
You do need to bear in mind your own circumstances as well, however. The amount you need, the amount you can afford to pay and the current state of play when it comes to your accounts are all equally important to consider.
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