Should you get a credit card or a line of credit?

November 29, 2012

Credit Cards CanadaIf you are choosing between a credit card and a normal line of credit, such as a loan, there are a number of factors which you can use to understand the differences between them and ultimately make the best choice.

Knowing APR

The Annual Percentage Rate (APR) is a key factor for comparison, with both credit cards and loans using APR as a basis for repayments. For a credit card, the amount you spend on purchases will be paid back with interest on top, as determined by its APR (10-40%). In general, a bank loan will have interest rates similar to the lowest credit card rates. Making your own comparisons lets you see which offer, in general, will ask less of you in the long run.

Repayment periods and introductory offers

A bank loan is designed to be paid back over a long time period. A credit card can be paid off for as long as there is an outstanding balance, however, credit cards do generally lead to much more being paid back in the long run. On the other hand, if you get a credit card with an introductory purchase APR of 0% and pay back what you spent before the offer ends, then you avoid paying interest altogether. If you can find a credit card with this offer and a high enough limit to meet your demands, it can be the best option if you are able to pay off the balance in time.

Most people cannot afford to pay back such a balance in such a short space of time, let alone receive the credit limit they desire, and in such a case it is better to apply for a personal loan.

Your credit rating

Credit ratings are very influential in determining what lines of credit you can and cannot apply for. People who have no credit history or a poor credit history would find it difficult to secure anything more than a high interest credit card with a low spending limit, whereas a homeowner with a good credit history could secure a large bank loan at a low rate (4-10%).

Making monthly payments

If you are considering a home equity loan or another similar loan, then the best thing to do is use a mortgage calculator to work out your monthly payments. Comparing this with the monthly credit card payment helps you see which will require less monthly payments. APR is not the be all and end all however, because many credit sources offer flexible repayment plans. Under such plans you can pay back more than a minimum amount when you are able to, which can help you repay the amount borrowed more quickly and thus incur less accumulated interest. There is usually more flexibility with a credit card balance, but many personal loans also let you choose your monthly repayment option.

The Verdict

All things considered, a credit card is mostly better when the borrowed amount can be paid back quickly, whereas a loan is better for securing a higher amount to be paid back over a longer period of time. If a credit card seems to be the best choice, then remember to be disciplined with its use, to avoid facing unexpected.