The Endless Cycle: Revolving Credit vs. A Loan
What is Revolving Credit?
Credit card debt is a serious problem that many people will be forced to deal with for years and years to come. It’s so easy to create, but can be pretty hard to get rid of. When you’re tight for cash, using your credit cards can become a bad habit; one that could land you in trouble. “Revolving credit” is a way to describe the whirlpool of debt that one can easily get sucked into. It boils down to this: if you use your credit card too much, you’re going pack on a bunch of debt that you’ll one day have to pay off.
Weighing Your Options: Loans vs. Revolving Credit
With a “closed credit loan,” also known as installment credit or simply a loan, you’ll be paying off a set amount of debt. Your lender will give you a specific amount of money to help finance whatever it is you need financing (mortgage, car, unexpected expense etc.). You’ll pay in monthly or weekly installments, a set amount every time. The amount that you’ve borrowed won’t grow or increase at all. Once you’ve paid the full amount, that’s it, you’re out of debt.
Watch our helpful video about payday and installment loans.
Let’s move on to revolving credit. It’s called “revolving” because it’s debt that can keep coming around and around, costing you much more than if you went ahead with a loan and a payment plan. When you use revolving credit you will always have access to the same credit limit as long as you pay it off. For example, if you have a credit card (which is a type of revolving credit) that has a $1000 limit and you use up $500, once you pay off that $500 balance, you’ll regain access to your original limit of $1000.
Check out this article on revolving debt.
Why is it so Easy to Rack up Credit Card Debt?
At the end of your credit card’s billing period, you don’t technically have to pay off the full balance (although you definitely should). You can pay something called the minimum payment. This might sound like a good thing, but it’s one of the fastest ways to get yourself into debt.
Essentially, credit seems like money that you don’t have to spend right away, better than forking over cash from your wallet. Even though you’re $1,000 in debt, as long as you pay the minimum fee, you’ll be OK until next month (the minimum fee will change depending on how much you owe). This is a common mistake that countless people make. Unless you read the fine print when signing for a credit card, you could end up paying tons more in interest fees, which can become costly when you don’t pay the full amount on your bill. This, coupled with balance protection and tons of other little fees that credit card companies will try and sell you, could put you in serious debt.
Before you read the next section, read our article on rewards credit cards.
The temptations will go on and on. Credit card companies and the banks that sell their cards will go to many lengths to get you to buy their products. They are businesses, after all. This includes glossing over important issues, by distracting you with all the exciting benefits credit cards often come with. Travel points, insurance, etc. While all this can be beneficial in some ways, be warned, it can distract you from just how much you could eventually end up owing. Many cards also come with a hefty yearly fee, which you’ll have to pay on top of the debt you already have. Furthermore, the debt you’ve racked up can affect your credit score significantly. As carrying too much credit card debt month to month is one of the many ways you can lower your credit score without even realizing it.
How Can You Stay Out Of Revolving Debt?
When you’re working a steady job and earning a decent paycheck, not paying attention to what you spend on your credit card can be costly, to say the least. If you’re not totally financially stable, it might be better for you to use cash and your debit card. If you feel like you really need a credit card, talk to your local bank manager, most banks can offer you a free card that you can use for emergencies. If you are stable enough with your finances, try to pay off the full amount on your credit card bill, on time, every month. For the more important expenses, like dealing with your mortgage, paying off your car or getting your business up and running, closed-credit loans can save you a lot of time and money.
In the end, either one of these options might be right for you. Not all credit card companies are out to get you. They, like any other business, are trying to sell you a product, and it is up to you to do a bit of research and decide whether or not this product will benefit you in the long run. Installment loans also have their upsides and downsides, like any other form of credit. If you’re not sure what option best suits your needs, talk to a financial advisor, and make sure you don’t get stuck an endless cycle of debt that you can’t handle.