Credit cards or loans? Which one to choose?

Credit cards and loans are often seen as being quite different. In fact they are the same thing: a company lending money to a consumer – and often with no security. Credit cards and loans are good for different purposes, but it should be remembered that they are in essence the same product.

One of the great differences between loans and credit cards is that a credit card is money with instant access. However, there are some similarities here. Whereas loans are approved at the same time the money is released, credit cards have a credit limit approved which means that the person is not obliged to get (or spend) all the money at once.

One difference between the two is that interest on credit cards is charged only when the money is spent. If the money is not spent, then no interest will be charged. This can be a very important difference if a person knows that he or she will need to borrow money, but perhaps not immediately or at short notice. Equally the facility is useful if the money is not needed to be spent in one go, for example when moving house.

Another difference between loans and credit cards are interest free grace periods provided by many credit cards for purchased products or services. For up to sixty days after the transaction, no interest will be charged on that purchase. This means that for short-term borrowing, a credit card can be far better than a loan.

However, because credit limits can be cut at very short notice, the credit card holder is vulnerable to the whims of the issuing bank. This is not the case with a loan, where loaned money is only recalled in exceptional circumstances.

Interest rates on credit cards are often believed to be higher than those for loans. But if a person has good credit, there is far less difference than is imagined, especially if they’re accepted for a long-term, low interest credit card.

Variable repayments can be another advantage of credit cards, which don’t require a fixed repayment amount but rather a proportion of the card balance as a minimum amount. Loans require a regular payment each month, and will often not allow for an overpayment to save interest.