3 Times You Should Choose a Personal Loan Over a Credit CardBy Caitlin in Loans
We’ve all been in a situation where we need to buy something right away but the cash just isn’t there, whether it’s for school, a gift or an emergency sometimes charging it seems like the best and easiest option. Credit cards aren’t always the answer to all financial problems and as a matter of fact they rarely make the situation better. Credit cards can and will make most financial problems you’re having worse. Next time you’re thinking about charging something important or something you can’t afford consider taking out a personal loan instead. A loan probably seems like a lot of work but in reality it’s no more difficult to apply for than a new credit card, here are 3 situations when you should choose a personal loan over a credit card.
1) When you’re concerned about your credit score.
Medical expenses like dental work and new eye glasses are extremely expensive and often not covered by all types of medical insurance; therefore people often choose to charge those expenses. Unfortunately the high costs of these medical expenses can hurt your credit score. Here’s the situation, if you have a $4,000 medical bill and charge it to a credit card that only has a $5,000 credit limit you’ll be using 80% of your available credit. One of the most important factors in determining your credit score is the ratio between available credit and used credit. If you constantly have a maxed out credit card or a card that only has a small amount of unused credit your score will be negativity affected. Generally speaking a good ratio to have is 90% available credit and 10% used credit.
This is where a personal loan can help. Loans or credit accounts will show up on your credit report as either installment or revolving. Credit cards are revolving and personal loans are typically installment, the “utilization ratio” doesn’t apply to installment loans so you won’t have to worry about it negatively affecting your credit score. In fact personal loans with installment payment plans will help you improve your score and show that you are responsible with your finances.
2) When you can’t trust yourself.
Sometimes credit cards with large credit limits can be extremely tempting especially when the minimum payment is often so low. Falling into the minimum payment trap is exactly what credit card companies want you to do, this way they make more money from all the interest that you’ll end up paying. If you need to pay for something important but can’t trust yourself to use your credit card responsibly and not continue to charge other things then you should consider getting a personal loan to cover your expenses.
Getting a personal loan to cover a specific cost means that you’ll only have access to the exact amount of money you need and won’t be tempted to spend it on something frivolous. Furthermore, a personal loan has a set repayment plan and due date, this means you’ll be able to make affordable monthly payment and won’t be in debt indefinitely. You’ll also save on interest as personal loans typically only take three years to repay and credit cards can take significantly more especially if you’re only making the minimum payments.
3) When you realize you’re paying too much interest.
In recent years there have been laws and regulations put into effect to prevent credit card companies from exploiting their customers. Unfortunately this doesn’t mean that all companies provide credit cards that have the consumers’ best interests in mind. Interest rates on credit cards can often be very high and if you’re unable to pay your balance completely every month you’ll end up spending too much money on interest. This can become an ever more serious problem if you have a variable interest rate credit card where your interest rate fluctuates.
On the other hand if you apply for a personal loan with a fixed interest rate you’ll always know how much interest you’ll be paying and there won’t be any surprises. Personal loans often have interest rates that are lower than some credit cards and payment plans that make it much easier to manage your finances.
Apply For a Personal Loan
Applying for a personal loan can be just as easy as applying for a new credit card. You can start the process today with Loans Canada and have the money you need within a week.