Should I get a Credit Card or a Loan?

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Doctor on computer looking for credit card

Deciding to get a credit card or a loan can be great for your finances. When managed well, credit from a reputable lender can give you control over your money, allow you to plan for the future and even boost your credit score. Credit cards and loans are two different avenues of credit that have several positives and negatives, so how do you decide which would be best for your circumstances? We look at both of these credit avenues in more detail.

Why do you need to borrow money?

There are lots of reasons why someone might need to borrow money. It could be that you need to fix your car, repair your house or just need a short escape from your day-to-day. It could also be that you have an emergency, such as an unexpected bill and now you need a quick injection of funds to take you through to payday.

For many people working in the NHS, an unexpected cost may prove to be a struggle, which could lead to high-interest loans from unethical payday lenders.

How to choose between a credit card and a loan

Deciding on whether or not a credit card or a loan would work best for you isn’t always as straightforward as most people think. Personal circumstances would need to be taken into account, as well as your short-term needs and long-term financial goals. To make the decision easier, we’ve set out the advantages and disadvantages of both.

Advantages to Credit Cards

You might have been put off credit cards because you’re afraid you might end up in unaffordable debt. However, if you manage a credit card well it can be an invaluable tool to prove that you are responsible with money and consistently pay back your dues.

Your Credit Score

One of the best things about taking out a credit card is the opportunity it gives you to build up your credit history and improve your credit score. Some credit cards are designed for people who have no credit history or a bad credit score, and when used responsibly, these cards could give you the opportunity to demonstrate that you’re financially responsible. However, these “bad credit” cards also usually come with a huge interest rate, which will need to be taken into account.

Purchase Protection

A credit card will even cover you if items bought with your credit card are lost, stolen or damaged. If the item qualifies, and you make a claim within the claim period, your item could be repaired or replaced and in some cases, you could be refunded for the lost or damaged item or service.

Cutting Down Your Debt

Some credit cards offer interest-free spending and interest-free balance transfers, which means you’ll be able to transfer your debt onto one credit card and, if they offer zero or low interest, you’ll be able to pay off your debts sooner than expected. Some credit cards will even offer rewards, perks and cash back every time you spend.

Disadvantages to Credit Cards

Yes, there are disadvantages as well! The most important thing when evaluating whether to get a credit card is to work out which advantages and disadvantages will have the largest impact on you and your financial situation.

Risk of Debt

The biggest disadvantage of taking out a credit card is the risk of getting into serious debt as a result. It’s really easy to overspend on a credit card, and if you have a card with high interest rates, it’s not always easy to pay that money back. This could actually cause more harm to your credit rating.

Your Credit Score

If you have a poor or limited credit history, you may only be able to get a credit card with a high interest rate. Which means that unless you pay everything back in full each month, you could put yourself into a downwards cycle of debt which will be hard to break.

Extra Fees and Charges

Using your credit card in certain circumstances may also generate extra fees and charges that you’d have to consider if you’re trying to organise your finances. Usually, a cash withdrawal using a credit card would incur additional charges, which means you may have to weigh up whether or not it’s worth using it. Therefore, a credit card may actually prove to have limited usefulness in certain circumstances.

Advantages to Personal Loans

If you’re struggling financially, or if you want to borrow money quickly and pay a fixed amount back each month, you may also want to consider applying for a personal loan. Personal loans also have several advantages and disadvantages that you should consider. Here are the advantages:

You May be Able to Borrow More

If you want to borrow a specific amount of money, you may be better off with a personal loan. Not only would a personal loan give you the opportunity to borrow more than a credit card, but it would also give you a repayment plan with a fixed amount each month, which could prove easier to manage than a credit card.

They’re Quick

If you have an emergency, such as a bill you hadn’t expected, the last thing you want is to have to wait for the funds to become available on your credit card. Usually, applying for and accessing a personal loan is a quicker process than the process for accessing funds through a credit card.

Disadvantages to Personal Loans

Although a one-off loan might seem easier to manage than a credit card, there are other issues that you should take into account before applying for a loan.

You could end up borrowing more than you need

Some credit providers won’t allow you to borrow less than £1,000, so you may end up borrowing more just to guarantee the success of your application. Sometimes, the interest rate on personal loans actually reduces the more you borrow, which is another temptation to borrow more than you need.

They Can Have High Interest Rates

Personal loans could actually have higher rates of interest than credit cards, which means that not only could you potentially be borrowing more than you need, you’d also be getting charged more interest for the extra credit you didn’t want in the first place.

It’s a Fixed On-going Commitment

One of the pros of a personal loan can actually feel like a con unless you’re prepared to budget each month. On the one hand, having fixed payments each month might enable you to better manage your finances, but if you can’t keep up the repayments, this could spell disaster for your credit rating.

Should you get a Credit Card or Loan?

The decision on whether or not you should get a loan or apply for a credit card is a personal decision, and one that only you can make. Depending on your circumstances, one could prove more beneficial than the other, and the way you use your loan or credit card has more of a bearing on the positivity or negativity of your experience.

Whatever you decide, we would always recommend you make sure you go with a reputable, fair and trustworthy lender. Worried that personal loans are too much hassle? We offer innovative, small, affordable loans through open banking, enabling us to make a fairer assessment of your ability to afford the loan you are applying. Apply for a loan from Salad Money today, and it could be in your account by tomorrow.

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