Spent too much on the credit card at Christmas?
The two common ways to deal with credit card debt:
- An ‘interest free’ balance transfer to another credit card
- A personal loan
Credit card vs loan – let’s look at the pros and cons of each, starting with the balance transfer…
Balance transfer pros
- Nil interest – MAYBE !
- Increase available credit with every monthly repayment
- Credit always available on your card when you need it
- Builds up credit history in order to get the best rates available in future
Balance transfer cons
- Temptation to spend & increase your debt is always there (credit card or debt card I should say!)
- There is no fixed end date by which your debt has be cleared
- Balance transfer fee still charged in many cases
- Difficult to tell sometimes that part of balance that is interest-free or when the interest free period will end if you use card during the interest free period to buy new goods / services / items
- You could be bombarded with personalised offers encouraging you to spend / use the card, tempting you into a never ending spiral of debt….the debt is never cleared, you just keep adding to it !
- You have to be very disciplined NOT to use your card & definitely clear your balance before the interest free period ends in order to benefit from paying no interest at all
So, having looked at the pros and cons of a balance transfer let’s take a look at the pros and cons of a low cost loan…
Personal loan pros
- No temptation to spend as a loan is not a credit card
- There is a fixed end date for loan so you know exactly when your debt will be cleared
- Loan repayments are also fixed enabling you to manage your finances better
- No early loan repayment penalties
- No hidden fees
- Helps build your credit history to easily access credit in the future
- Borrowing from a not-for-profit, ethical lender that has been providing fair & affordable financial services for local residents & workers since 1993
Personal loan cons
- You have to make a loan repayment regularly, every month, for the term of the loan i.e. pay the money back !
- The need to pay interest – but at least you know how much and some lenders (like us 😉) charge a lot less than others !
- You have to apply for the loan & submit any necessary paperwork – though this can be as quick as a few minutes with some lenders (like us 😉)
- Be careful not to use up all of your monthly disposable income to cover the loan repayment & not leaving enough aside for emergencies like when the washer breaks down
- Be careful not to rely on irregular income to cover your loan repayments e.g. overtime, which in most cases isn’t guaranteed
So, which is better?
Hopefully this guide will help you to weigh up the pros and cons of a clearing a credit card debt with another credit card vs a personal low cost loan and make the right decision for yourself.
Credit card vs loan? In the end, the main difference comes down to how self-disciplined you are! If so, then consider a balance transfer, otherwise consider the certainty of a personal loan.
While you’re here you might want to check out what sort of low cost loan you could get with an ethical not-for-profit lender like us – it only takes a few minutes!