Many people treat credit cards the same way as regular loans. But that’s far from the way things work, especially if you want to have a more conscious and responsible approach to your finances. There are, in fact, many differences between the two in terms of advantages and disadvantages, as well as their generally intended application. Understanding these differences is critical if you want to make the most of your personal finances.
A credit card and a personal loan both have their uses at the right time. As long as you’re informed and don’t make the choice randomly, you should end up getting a good deal out of the whole thing.
Understanding the Basic Differences
Credit cards can be seen as very short-term loans in certain ways. However, as we mentioned above, they’re not quite the same thing. With a credit card, late repayment fees start kicking in quite fast, and you’ll have to deal with interest rates that might become almost impossible to manage at some point if you’re not careful. There’s a reason so many people default on credit cards as opposed to regular loans.
On the other hand, a personal loan will generally have more relaxed conditions, and you might be able to get away with paying less over a longer period of time. But in most cases, you’ll find it more challenging to get qualified for a good personal loan if you have a bad credit past (more on that below). It may also come with certain conditions attached that are not always ideal for everyone’s financial situation, such as requiring you to use the money towards something very specific.
Your Credit Score Matters
The way you’ve handled past lines of credit will be one of the main deciding factors in whether you can get a good personal loan or credit card. In most cases, if you have a poor credit score, you can pretty much forget about any good deals on the market. You might be able to convinced a lender to allow you to take out a larger loan if you have good collateral to put up, but other than that, you should not expect good results.
With that in mind, do your best to remedy that situation before taking out a loan in the first place. That might sound like silly advice since most people who need to take out a loan often don’t have the time to fix credit score issues, but there’s more to it than that. You should try to maintain your score in a good condition in general, so that when the time comes when you need to borrow money, you will have a better range of options available.
Long-term Benefits and Concerns
Credit cards and loans both impact your financial situation in a different manner in the long run. Generally speaking, as long as you’re able to make payments on time, a credit card might provide you with a better boost to your credit score over a longer period of time. This is even more valid for special cases where you’re incentivized to use the card even more often, such as cards with travel rewards.
Speaking of rewards, that’s another point in favor of credit cards. Many of them come with special perks attached that you just won’t get with any loan product on the market. These can vary greatly, but in many cases can provide you with better prices at specific stores, special deals when traveling abroad, and more. You might even be able to get some services like your monthly Internet subscription at a reduced price!
The Overuse of Credit Cards
There’s also another side to this though. Some people are quite careless with the way they use their credit cards, taking out one after the other simply because their banks allow them to. Keeping many lines of credit open and underutilized can incur a credit score penalty later on though, so make sure you know what you’re doing if you’re going for a new card.
This goes double if you’re currently still paying off a previous card! That’s possibly the worst time to take out a new card, especially if your goal is to “just” repay the old debt with the new one. That’s a terrible approach to personal finances and something which will put you on the fast track to a very difficult situation. Don’t underestimate the potential of multiple lines of credit to mess up your finances, especially if you’re not familiar with working with debt in the first place! When in doubt, you should go for a personal loan in cases that concern an immediate, one-time purchase. This will have a much smaller potential of messing up anything in your personal financial situation.