Loan Vs. Credit Card: Unveiling The Right Tool For Your Financial Needs

June 5, 2024
Personal Loan

Nowadays, life has become an ever-spinning wheel in which planned purchases or unexpected expenses can arise at times. Sometimes these financial activities create a situation that necessitates the borrowing of money. But with the availability of a plethora of options, it is very confusing to navigate the best between the multiple options of credit cards and loans for borrowing funds. Should I go for a flexible credit card or a structured personal loan? It is the question that revolves around in the mind. Don’t worry at all, as this blog will help you with the dos and don’ts of both options. It will empower you with the knowledge of both the options that will aid you in making informed decisions depending upon your requirements.

The Allure of Personal Loans

Personal loans do have fixed interest rates and predetermined schedules of repayment. These are known for providing you a control over your expenses. Some features of the personal loan are as follows:

Structured Repayment: A clear schedule for repaying the loan amount is being followed by the personal loans, the scheduled timing for repayment ranges from 1 year to 5 years. The structures are used to foster discipline among the borrowers. This option will help you in getting debt-free at the end of the loan terms; if the repayment schedule was followed by you and payments were made on time.

Fixed Interest Rates: Unlike the fluctuating rates of credit cards, personal loans are available with a fixed rate of interest. This rate of interest will get fixed for you at the time of approval and remains unchanged through the loan term. This feature of predictability will allow you to ease your budgeting, as it aids you with the constant monthly payments throughout the period of the loan.

Larger Amounts: You can avail of a personal loan for fulfilling your significant expenses such as debt consolidation, car repair, and home renovations. The lenders of personal loans typically offer higher amounts for loans as compared to the limits provided by the credit cards.

However, Personal Loans also Bring Some Drawbacks with Them

Impact on Credit Score: By taking a new loan, a temporary dip can be observed in the credit score due to credit inquiry. But this dip can be recovered and the credit score can be improved if repayments of the loan can be done on time.

Less Flexibility: You cannot get access to the additional funds until you get a new loan, once you have received the loan amount. The option of a personal loan is convenient to use in case unexpected expenses are required in the process of project execution.

How to Track Your Credit Score The Credit Card Conundrum

Credit cards will aid you with instant access to funds through their pre-approved credit limit. This feature of the credit card makes it suitable for unexpected emergencies or everyday purchases. Some of the pros and cons of using the credit cards are provided below:

Building Credit: Using a credit in responsible manner can aid you in improving your credit score, it can be easily done by repaying the balances on time and in full amount. You will get access to better loan terms and interest rates in the future if you have a good credit score.

Potential for Reward: Rewards are provided by many credit cards for their usage, these can be in the form of cashback points, travel miles, and other benefits. This will aid you in availing of significant savings on traveling and future transactions. It comes with an annual fee, so if it is not used strategically then it might outweigh the benefits gained through the rewards.

Convenience and Flexibility: With the help of a credit card, you will get the ease of usage. You can select the way to pay out of the options available such as Swipe, Tap, or Pay Online. It lets you pay out the interest for only the outstanding balance amount from the credit limit which leads to effective management of cash flow.

With all the above benefits, there are some drawbacks also to using a credit card. It acts as a sword with double edges. The drawbacks of using credit cards are as follows:

High Interest Rates: A higher amount of interest rate is associated with the use of credit cards, especially in the case of not paying the full balance amount each month. This interest works as a snowball, as it can quickly transform a smaller purchase into a huge financial burden in the end.

Temptation to Overspend: Due to the ease to access of credit cards you can easily get lured towards impulsive purchases. This temptation can derail your budget and planning which leads you into a cycle of debt.

So, Which One Should You Choose?

Like the other financial decisions, the answer to this will also be “It depends”. Check to get a quick recap of the points that can help you select the best option out of the two available:

However, avoid overspending to earn rewards, and always pay off your credit card balance in full to avoid interest charges.

Opt for a Credit Card:

It will let you earn good rewards for your spending.

It will also aid you to enhance your credit score.

You can use it for doing your everyday purchases when you can pay off the outstanding amount in full at the monthly cycle.

Consider a Personal Loan:

It will help you cover the larger expenses by providing you with a fixed budget.

It will aid you in building discipline through its structured plans of repayment.

It can also aid you in consolidating your outstanding debts to simplify the repayment process.

Final Thoughts

Regularly tracking your credit score is a crucial aspect of managing your financial health. By understanding your score and the factors influencing it, you can take proactive steps to maintain or improve it. Utilize free services, subscribe to credit monitoring if necessary, and always stay vigilant against fraud. A good credit score opens doors to better financial opportunities, so make it a priority to stay informed and in control. In conclusion, your credit score is more than just a number—it’s a reflection of your financial habits and a key to unlocking various financial benefits. Start tracking your credit score today, and take charge of your financial future.