Credit Cards Vs. Personal Loans – Which Is The Better Option

When might the use of a high-interest credit card be your best option?

Credit card and personal loan articles are common on this website because most people have one or both in their lifetime. We have approached this issue from a number of different angles, so this time we thought we would approach it from a pros and cons stance. This article examines credit cards vs. personal loans and details the upsides and downsides to having a credit card and a personal loan, and we examine each in the context of which it is better to have.

There are four Big Mistakes that some people make that I have highlighted in this article. These mistakes will cause you a lot of suffering if you make them. They are common errors and will significantly damage your financial future.

It is a known fact that credit cards are easier to get than personal loans. Many companies are willing to issue credit cards to people who have a terrible credit rating (FICO score). What’s more, the application process is often very quick, the decision process is quick, and many people receive their credit card less than five days after applying.

Credit cards are accepted almost anywhere, especially overseas when traveling to different countries. It is true that some cards are not as widely accepted, but in general, your credit card will be accepted in most places. When it comes to credit cards vs. personal loans, you may save more money using a specially chosen credit card for going abroad, rather than getting a personal loan and converting the money.

Credit cards help to boost your purchasing power, such as by allowing you to exploit bulk-buy savings and rare offers. Some people take out a year’s insurance on a car and put in on their credit card because the interest they pay on their credit card is less than the penalty the insurance firm charges on installment payments.

You are able to buy online and over the phone with a credit card, you are not able to send cash over the phone or over the Internet without a further intermediate such as PayPal or Transferwise. When it comes to choosing credit cards vs. personal loans, credit cards are ideal for online and telephone shopping.

A credit card is fantastic for things such as an emergency or an unexpected expense. One could make a similar argument for a personal loan, but one would have to keep the personal loan money in an account and leave it there while still paying interest in order to repay the loan. The money on a credit card may sit there for years without costing you a thing–only being used when it is needed for an emergency.

Sensible People Are Able To Create Solid Budgets Including Credit

Create your own payments and installments plan when you cannot get financing for something. The seller may only be willing to sell on the spot, and you may pay with a credit card, and then pay off your credit card with installments of your own choosing, (assuming you cover the minimum and then a little extra to slowly pay off the balance).

Some Interest Rates Will Beat The Rates That Finance Companies Offer

Interest rates are a big deal in the credit cards vs. personal loans debate. The interest rates on credit cards are often higher than personal loans, but they sometimes beat the rates you get for finance deals. Instead of taking a finance deal with unfavorable repayment and interest options, you may pay with your credit card and enjoy their lower interest rates and slightly more flexible repayment options.

If you can handle it, and if you make regular repayments without overdrawing or missing payment, then you may build a positive credit history with your card. Start with a very low credit limit to lower the risk of you falling into massive debt. If you can handle the card and you keep paying off the balance, then your credit history will start looking pretty good.

If you use your credit card for expenses and repay the balance at the end of the month, then you may easily monitor your expenses and maybe improve the way you spend so that you spend less and manage your money better. People who are able to repay the balance at the end of the month are also able to exploit their card by accruing points and rewards without having to pay for them.

You may dispute billing errors if you have a credit card. You have more protection if the merchant sells you defective merchandize, or if the merchant bills you incorrectly. Do research into the protection that the card you are signing up for will offer you. It may seem like I am arranging a cop-out when I say do your research, but the fact is that some cards offer a massive amount of protection, and there are numerous stories on the Internet where paying with a credit card has helped people avoid very large losses. On the other hand, I don’t want to promise such protection when I cannot guarantee that every card will offer such strong and secure protection.

The Temptation To Spend Is All-Consuming For Some People X X Big Mistake X X

Having a money on a card is often all the incentive some people need to start spending. Most people are repeatedly taught to spend all the money they have. The sad part is that they honestly believe that they are not susceptible to marketing, and yet they have no money at the end of the month, (i.e. before they are paid). A great many people have maxed out credit cards that they are struggling to pay down because they spend whenever they have money on their card.

A Rolling Balance Is Very Dangerous For Your Financial Future

Rolling a balance over from one month to another is a common occurrence for people with credit card debt. A constantly maxed card is very common, but many people are happy to leave money owing on their card for months. For example, one person may have a $2000 limit, and has only spent $400, but has had that $400 debt for months. Such a person will only pay the minimum balance that pays off the interest owed on the debt. He or she will not pay off the $400.

Credit cards will charge varying amounts of interest depending upon how you use the card. The best rates are often for making purchases, and the worst are for overdrawing. If you draw money out or do anything that is regarded as a cash advance (such as loading money onto a gambling website), then the interest rate you pay on the debt is often rather harsh. When considering credit cards vs. personal loans, remember that the amount you budget for your credit card may not be the amount you pay in a few months or a few years.

If you overdraw, you are often charged a fee, and you are charged a higher rate for the debt you get yourself into. The reason this point gets its own header is because people are often surprised how much their minimum credit card payments go up when they overdraw or miss a payment. Many credit card companies will hide their highest fees and interest rates within the term that states they can charge more if you overdraw or miss a payment.

If you have a credit card for long enough without overdrawing or misbehaving, then they may increase your limit. This means that a user may go from starting with $1200 of debt, to $2000 of debt, to $3500 of debt by simply spending the money as the credit limit is increased over time. Many credit card companies have an “opt out” option on their website for this very reason, where users may opt out of having their credit limit increased.

Credit Scoring Companies Do Not Like Too Much Credit Card Debt

Too much debt is never a good thing and it will reflect poorly on your FICO credit history. However, many credit companies look unfavorably on credit card debt more than other types of debt. For example, if you have $5000 or unsecured loan debt, and your friend has $5000 of credit card debt, then credit companies will look more favorably on you and less on your card-holding friend.

Credit card fraud is a possibility, though many card companies have safeguards against such things. There is a chance that you will get your money back if you use a credit card and you are defrauded. When considering credit cards vs. personal loans, there is a lot of protection offered for credit cards, but you also have to be vigilant, careful and conscientious to be sure you do not invite crime or disaster.

Credit limits are typically lower than what you get with personal loans. For some people who have a habit of getting into debt, this point may be an upside, but if you need more money, then a credit card is not the way to go.

Credit Card Debt Is The Hardest To Get Out Of X X Big Mistake X X

They are the hardest type of debt to get out of because you can keep spending the money you repay. It is not the credit company’s fault that you spend money on your card every time there is money on it, but credit companies are making huge amounts of money because of people doing just that. Paying back the minimum will still involve years and years of debt, and APR and/or interest rates are typically far higher than they are with personal loans.

A personal loan will be paid off one day if you simply keep paying the minimum payment. It is one of the biggest upsides to having a personal loan over having a credit card. You can keep paying the minimums on a credit card and stay in debt, but pay the minimum on your loan, and you will eventually clear the balance.

Credit cards may be accepted everywhere, but personal loans give you money, which you can use anywhere (assuming that it is correctly converted to the local currency). The money you receive from your loan may go onto a debit card that is not accepted everywhere, but the money is if you draw it out.

Increase Your Purchasing Power With A Personal Loan

You may get a personal loan to help increase your purchasing power. With the extra money, you may buy in bulk or take advantage of rare offers. Some people do not have the self-discipline to keep hold of the money until it is needed, but on the same token, some people do not have enough self-discipline to keep money on their credit card until it is truly needed.

Getting a personal loan will often mean lower interest rates than what you get with credit cards. It also means lower interest rates than what you get with finance deals. It is often cheaper to get a personal loan rather than opting for a finance deal. Repayment terms are often more flexible with credit cards, but if you pick loan repayment installments that you can afford–then it shouldn’t be a problem.

You May Build Your Credit History With A Personal Loan

Build your credit history with a personal loan. Start small and pay it back on time. Make regular payments, don’t miss any payments, and stick to a short repayment schedule. Once you have paid off one, you may take out another and do the same again with a slightly larger amount. It is often better if you do this and have a credit card at the same time.

A personal loan often has fixed repayment terms. You are asked for a certain amount every month until the balance is paid. A credit card will ask for a certain amount every month, but the amount they ask for may vary depending upon how much you owe the company. It is often easier to budget for a fixed amount than it is for a variable amount.

You Are More Likely To Receive A Fixed Interest Rate

A credit card may charge a different interest rate if for purchases, for overdrawn money, for withdrawn money, and for anything that appears to be a cash advance. This is far less likely with a personal loan, since most companies offer you a fixed rate unless you take action to change it.

A Personal Loan Allows You To Create Your Own Repayment Term

You choose how long it takes to repay your loan. The company may limit how long you have to repay the loan, such as insisting that the loan lasts no longer than six years, but you still have the option of picking how long the loan lasts. If you do not like the term, then you have the choice of refusing the loan and searching for a better offer.

Typically, you are able to borrow more with a personal loan. When credit companies look at your credit score, they make a judgment on how much you are able to borrow from them. Credit card companies are often more likely to offer you lending facilities, but if a loan company offers lending facilities, they tend to offer more than the credit limit you get with a credit card.

It is possible to overpay on a credit card too, but overpaying on a loan has a more significant impact. Overpaying on a credit card may have little effect on your debt if your subsequent interest debits increase the amount of debt on your credit card. Try to pick a loan company that doesn’t charge extra fees for early repayment.

That is to say that interest rates may be simply awful. It is true that many people get a worse rate on their credit card than they do on their personal loans, but that doesn’t mean there are not vultures out there who will sting you with a very high rate because you have had a little financial trouble in the past. At times when you really need the money, there are always lending companies that will rip you off with a truly terrible repayment and interest rate. When thinking about credit cards vs. personal loans, do not overlook the fact that some personal loan companies are just as callous as credit card companies.

Payday Loan And High Interest Loans Are The Worst X X Big Mistake X X

Generalizing in this way is a little unfair because some payday and high-interest loans have saved people from losing everything. There are times when getting the money quickly is vital in order to stave off a terrible loss, even if the APR rate is very high, you may lose less through having the loan than not having the loan. Nevertheless, some people dig themselves into tremendous amounts of debt because they have and use high-interest loans.

You May Still Be Defrauded Out Of Your Personal Loan Money

There is a lot said about credit card fraud, but you may just as easily be defrauded out of your personal loan money. The reason that personal loan fraud is less common is because people tend to spend the money from their personal loan very quickly, which leaves a very small window of opportunity for fraud. Whereas, a person with a credit card may have one for years, which is a very wide window of opportunity. If you are defrauded out of your personal loan money, then there is often very little you can do about it, but if you are defrauded

The low interest rates on loans and the availability of money via a personal loan may tempt you to borrow more. It is true that a credit card offers money on a plate that you may spend at will, but personal loans have a similar temptation. In the distant past, I took out a loan with a peer-to-peer company, and they allowed me to take out the loan for the amount I required, but they also offered a very seductive interest rate on a loan that included $2000 more. The amount I paid in interest was marginally more than the amount I was originally going to pay, and I was sorely tempted to borrow money that I didn’t need.

Continuing To Use Credit Cards X X Big Mistake X X

If every consolidation loan would also ban people from having, owning or using a credit card, then the world would be a better place. There are so, so, so many people who take out a consolidation loan, and do not repay their credit cards with it. Worse still, they pay off their credit cards and then go right back to using them. This is a solid and powerful way of landing yourself in more debt than ever before, and it is so easy that warning should be tattooed onto the foreheads of people who make this mistake.

A Personal Loan Can Land You With Higher Monthly Payments

If you simply repay the minimums on your credit card, then you will be in debt for years and years. However, that doesn’t lessen the fact that your monthly outgoings may increase permanently if you have a personal loan over having a credit card. When thinking about credit cards vs. personal loans, remember your monthly outgoings as well as the final amount you will owe. Common sense says that you should prioritize the final amount you will owe, but if your repayments cost more than your budget allows, then you put your financial future in jeopardy.

If you are the type of person who pays off his or her credit card balances, then a consolidation loan may save you significantly less than you imagine. As you pay off your credit card, you are charged less interest per month. Calculating your savings based on lower interest payments per month is rather tricky, which is why some consolidation loans may not be worth the effort because you may be saving far less than you think.

Conclusion – There Is No Easy Answer For Credit Cards vs. Personal Loans

Speaking as the writer of this article, I have missed a heck-of-a-lot of points because the issue of credit cards vs. personal loans is very complex and is a very large issue. If I had my way, I would write a book on the subject, or maybe a week-by-week series on the subject. There is no easy answer because both forms of credit have their pros and cons, (as you have seen by this article), and it is up to you to decide which you should choose.

All I can say is that you start slowly and very small because you may have a predisposition for getting into debt, and it is going to ruin your standard of living if you fall into debt that you cannot get out of. If there is any chance that you cannot sensibly handle your debt, then please do not get into it in the first place.

wiseGEEK: What is a Good Interest Rate on a Credit Card?

It’s very difficult to define a good interest rate on a credit card because there are so many factors that can determine the value of any one card. In the United States, there are rates that range between approximately 6% APR to nearly 40% APR. It might help to know that most department store cards have slightly less than 20% APR. Other countries may pay much higher interest rate amounts; Mexico may charge rates of between 30-50%, especially for store issued cards. As a result, defining “good” may be partly based upon a person’s location in the world.

In the US, the lowest rates that are not introductory offers usually sit at about 6%, and these are often offered to people with secured credit. This means that credit is usually backed by equity in homes or businesses. People looking for unsecured credit may be able to find cards with a rate of about 10%, though this is subject to change. These rates are not expected when people’s credit is less than perfect. Even with imperfect credit, many people can get cards that loan at about a 20% rate, and it probably isn’t a good idea to accept a card that charges more than that.

This doesn’t include introductory rates, which may be offered at 0% or a much lower fixed rate than is average. A 0% interest rate may apply to balance transfers or new purchases only, and these offers are usually time sensitive. People tempted by offers with no to low interest need to evaluate the actual rate once the introductory period is over.

Interest rates alone don’t determine a good credit card. Sometimes, a credit card with a higher rate allows people to accumulate lots of frequent flier miles, or gives cash back on purchases. It’s occasionally worth it to have a slightly higher rate if there are benefits that compensate for it, though this should be weighed carefully.

Not all low rates mean that people are getting superior cards. Consumers need to check for hidden fees, including those charged if the card isn’t used enough, for overuse of the card, additional charges for withdrawing cash, and exorbitant late payment amounts. Exceeding the credit limit may also kick fees into high gear.

When people always pay their cards off at the end of the month, a few points in interest rate, provided there is a grace period, really don’t matter. This figure becomes considerably more important when a person maintains a balance on a card. Higher balances do translate to greater cost to borrow money. Those with poor credit will typically pay higher rates, and they may have more trouble paying off balances. It may still be possible, if credit is imperfect, to get a slightly lower rate by scanning through credit offers and looking online.

5) I have a credit card that has 0.00 percent interest. It was an introductory rate that has never changed. I've had the card for maybe 10 years and never paid any interest. I absolutely carry balances from month to month. My max credit is $15k. I think the most I've carried was about $5k - it took maybe a year to pay that down. Other than no interest rate, it has no other perks.

How is this possible? I'm afraid to ask them.

4) I have an American Express credit card with 10 percent interest that gives me rewards that I can use towards travel, credits on my statement, or gift cards.

3) Credit unions are often very easy to join. Some credit unions only require that you, or a family member, are faculty, staff, or a student at a certain school or school district. Others require that you, or a family member, are a state employee or resident of a certain state.

Many credit unions also form networks with other credit unions across the country, allowing members to access basic services free at network locations.

I have credit cards from a credit union and the interest rates and services are great.

2) @ ValleyFiah- Credit unions are a great place to get credit. Many credit unions have adjustable rate cards that change with the prime rate. This usually works in favor of the members because the rates stay as low as possible.

Many credit unions may offer rates as low as prime plus the margin, and cap their rates at 20%. The reason that they do this is because credit unions are cooperatives, owned by their members. Their business structure is designed to benefit the members, in turn offering them the best services for the lowest rates.

Fees and interest rates are normally less than for profit banks. Credit unions are also more involved in local community, and often offer things like scholarships and favorable loan terms for their members.

1) I am a full time student and I have fair to good credit. My credit is not perfect by any means, but I have an unsecured visa platinum with an 8% interest rate. The credit Union also caps my maximum APR at 18%, far less than the 29% + allowed under current federal law. I also have no annual fees and my credit limit is eligible for yearly review. The secret is credit unions.

My card is not a rewards card, but if it were, my terms would be the same except for a 10% interest rate. The reason I do not have a rewards card is that I carry a 30-40% balance, so the two percent increase in interest would negate the one percent gain from the rewards program.

I also have my vehicle loan through the same credit union and I was able to get a rate that was 6 points less than the big national and multinational banks.

3 Reasons Why Taking a Cash Advance on Your Credit Card is Financial Suicide

When might the use of a high-interest credit card be your best option?

When you’re in desperate need of money that you don’t have, one option is to withdraw money using your credit card. That’s right. All you need is to have a PIN for your credit card – one should have been issued to you when you first received it. With that PIN, you can go to any ATM in Singapore and get the money you need. Seems simple, right? Know what else is simple? Getting a drink from a stranger at a bar, and then waking up the next morning without a kidney.

Huh? What drink with what stranger? Don’t scare me lah…

When you withdraw money from your credit card account, what you’re really doing is taking out a short-term cash loan against your credit card’s credit limit. This loan is on a revolving basis, which means you’re being charged interest on the outstanding amount from the second you withdrew the money at the ATM.

But I thought that if I pay my credit card bill in full and on time, I won’t be charged any interest!

That only applies to retail transactions – like shopping, or dining or buying stuff online. Credit card cash advances work differently. Since they are cash loans, they can (and should!) be repaid at any time, especially since you might find yourself in more trouble than before you took the credit card cash advance.

Here are 3 reasons why taking a credit card cash advance is a VERY bad idea.

If you thought credit card interest rates were high, cash advance interest rates are at least 3% more! Banks like DBS and UOB charge 28% a year for cash advances. OCBC charges 28.92% per year. What’s worse, interest is incurred on a daily basis, which means compounding interest. While compounding interest is your best friend when it comes to investments, it’s your worst enemy when it’s applied to loans.

Here’s an illustration to show you just how bad it is:

Say you need to take a loan of $1,000 urgently so you withdraw a cash advance from your OCBC credit card account. If you took a year to pay it back, you should expect to pay only $289.20, right? Wrong. Because of compound interest, where the interest is added daily to your original loan amount, you would be paying back a total interest of $335.21 after a year.

That’s paying almost $1 in interest for each day. Doesn’t sound so bad, right? That’s because that’s not the end of it.

If you thought banks only earn money by charging you interest, then it’s time to burst your bubble.

Other than charging you interest, banks also earn money by charging you all kinds of fees. The second you take out a credit card cash advance, you’re charged a cash advance fee. For DBS and UOB, this is 6% of the cash advance amount, or $15, whichever is higher.

That means that the second when you take out a cash advance of $1,000, the bank’s already charged you $60. So even if you take out the loan just for ONE day, you’re already poorer by $60.

But if you’re in desperate need of cash, there’s nothing else you can do, right? Just suck it up and deal with the high interest and fees that credit card cash advances bring with them, right? Wrong.

Instead of a credit card cash advance – you may consider applying for a personal credit line. For example, DBS offers Cashline, which currently offers a promotional rate of 8.88% for a year instead of the usual 19.8% for a year. OCBC’s is called EasiCredit and offers a rate of 19.98% a year.

While those interest rates are still relatively high, they’re definitely significantly lower than the credit card cash advance rates.

But the best option, is to go with a personal loan, also known as a term loan. A personal loan not only has lower interest rates, but the interest charged is not compounding. What’s more, you get to repay the loan through fixed monthly instalments, making it much easier to control your cash flow.

If the personal loan is only charged at 14% per year, you can expect to save about $200 on a loan of $1,000. That’s a significant amount, and you won’t have to worry about your kidney either.

I am the poster boy for reinventing one's self. I've been a broadcast journalist, technical writer, banking customer service officer and a Catholic friar. My life experiences have made me the most cynical idealist you'll ever meet, which is why I'm also the co-founder of a local pop culture website. I believe ignorance is not bliss, and that money is the root of all evil only if you allow it to be.