Finding the right credit solution can bring new flexibility, with access to funds that keep you moving forward. Let’s look at how personal loan and credit card work and find the right one for you.
Credit cards enable convenient, secure shopping and transactions
Credit cards provide a convenient and secure way to pay for purchases and make other transactions, both in person and online. Credit cards work as loan cards. They're a common feature of modern life, accepted broadly and used with confidence.
Credit cards are easy to apply for, usually requiring your affirmation of your annual income, with a fast review process. If approved, you'll be assigned an account and a card with unique identifying numbers. Your card will also be assigned a credit limit, which limits the amount of money your card issuer will lend you.
Two things come to mind when looking to manage their finances: personal loans and credit cards. A personal loan provides a lump sum amount that you need and has fixed repayment terms and interest rates. These loans are good for debt consolidation. On the other hand, a credit card offers a line of credit with the flexibility to make multiple purchases and repay later.
Is a Credit card a Loan?
A credit card is a type of loan that differs from a personal loan. In a personal loan, you get a lump sum from a lender and repay in fixed monthly installments with a fixed interest rate. A credit card is a line of credit that allows you to borrow some money from the credit limit with a variable interest rate and you need to repay it later on.
How to use a credit card?
With a loan credit card, you can make a purchase and you'll pay for it later. At the end of each month, you receive a statement that details the purchases made with your card during the month and how much you owe.
The statement also presents your payment options, and your options will vary month to month, depending on how much you owe and any fees or charges.
Typically, you're offered three payment options: the full balance, a partial amount, or the minimum payment due. (The minimum due usually covers just the interest you'll be charged if you choose to carry the full balance until the next month.)
Most experts recommend paying the full balance each month. If you pay less than the full balance, you’ll pay interest on the balance you’re carrying forward. The more balance you carry, the higher your interest charges will be.
How to find the right credit card?
Look for cards with a low APR ("annual percentage rate"), no annual fee, low late fees, a comfortable credit limit, and rewards like cash back or travel perks.
The better your credit history, the better terms lenders will offer you on your credit cards. With excellent credit, you'll be offered a higher credit limit and lower interest rates. With a poor credit report, you might face higher interest rates.
Most credit card issuers offer cash advances, but they typically charge higher interest rates for the service.
Some cards are designed as "balance transfer credit cards." They usually offer a low or 0% intro interest rate for the first several months, to encourage you to move funds from cards with higher interest rates. The intent is to allow you to pay off those debts over the months the low or zero interest rate applies. But be aware that some issuers charge one-time balance transfer fees.
You can also choose Bright Credit, which offers a credit limit of $500 to $ 8,000 with an APR (annual percentage rate) between 9% –29.99%. This credit card does not charge annual, organization, late, and prepayment fees.
A personal loan can finance large purchases and debt consolidation
A personal loan is two types: secured and unsecured loan. A secured loan requires collateral and approval by a lender. An unsecured loan does not need any collateral for approval. These loan application processes can take some time, often longer than applying for a credit card.
When you apply for a personal loan, you'll need a credit report to prove your creditworthiness and something of value - like your home, your car, or luxury items - to serve as collateral, that your lender can claim if you don't pay the loan back.
Credit Card and Personal Loan
Personal loans are also used as debt consolidation loans, where the lump sum is used to pay off credit cards. Convenience and savings are the primary rationales: streamlining debt management to the loan's monthly payment and paying less in interest charges with the loan's lower interest rate.
Before taking on a personal loan, make sure the APR is lower than your cards' and the loan amount is enough for your planned use. Check the repayment terms too, to ensure they fit your budget, and ask about origination fees.
Like credit cards, always note payments' due date, and like with card issuers, good credit can translate to lower interest rates, and bad credit can result in a high interest loan.
Know how your credit options work
Keep in mind that personal loans aren't the same as instalment loans, which require repayment of your balance at the end of every month or billing cycle. Instalment loans are also increasingly rare, and they aren't usually recorded on your credit score, so they may not be a good option if you're trying to boost your creditworthiness.
The best personal loans work for you, your money, and your bottom line - the demands of your own household's personal finance.
Before taking on more of any type of credit, make sure you're not overdoing it. Lenders and credit card companies often review your credit utilization - which reflects how much of your available credit you use at any given time. If a new credit card or personal loan invites more spending, make sure you're looking at overall credit use. Most experts recommend using no more than 30% of the credit available to you.
Can you pay a personal loan with a credit card?
Yes, You can pay a personal loan with a credit card, but it comes with an additional charge, such as balance transfer fees. Before paying your loan with a credit card, consider the fees and interest rates carefully. However, paying your loan with a credit card is not the right decision because it can lead to more debt and interest rates.
Is a personal loan better than a credit card debt?
Yes, a personal loan is better than a credit card debt because a personal loan offers a lower interest rate, fixed repayment term, and the option to consolidate multiple high-interest rate credit card debts into one single loan.
Use Bright Money to manage your card debt
Bright doesn’t offer debt consolidation loans. But we can help you get debt-free faster, save you money on interest charges, and do it all automatically.
Bright Balance Transfer offers a low-interest line of credit designed to pay off card debt fast while saving you from high-interest charges. Once approved, Bright uses the funds from your Bright Balance Transfer to pay off your high-interest cards, moving those debts to our balance transfer program with its lower APR. Over the months ahead, Bright automates your new repayments, too, so you pay less in interest and it’s hassle-free. Bright Balance Transfers offers credit lines of up to $10,000 at APRs starting from 9.95%, depending on your eligibility.
Bright Credit Builder is an easy way to boost your credit score. With a healthy credit score, you can qualify for lower interest rates on cards and loans. Once you’re signed up, we’ll set up an interest-free, secured line of credit and use it to make automatic payments on your cards, building a positive payment history and lowering your credit utilization. Bright Credit Builder focuses on utilization and payment history because as they improve, your credit score goes up!
Bright can pay off your card debt faster, too. With a personalized Bright Plan, we’ll use our patented MoneyScience™ to learn about your finances, follow your goals, and make payments for you - automatically. You'll pay less in credit card interest, you'll see improvements in your credit score, and you’ll get debt-free faster.
If you don't have it yet, download the Bright app from the App Store or Google Play, connect your accounts, and get a faster, smarter way to pay off your debt.
References
https://www.thetimes.co.uk/money-mentor/loans-credit-cards/loans/loan-or-credit-card
https://www.nerdwallet.com/article/loans/personal-loans/personal-loan-vs-credit-card
