With interest rates on the rise, people are increasingly looking for the cheapest ways to borrow money. Credit cards are often one of the first options people consider because of their flexibility and ease of use. Loans and lines of credit are also common ways to access funds. So which option is best?
Bianca Selby, Branch Manager at Assiniboine Credit Union Garden City, has helped hundreds of clients secure the best credit for their situation. With varied rates and rules, she always expresses the importance of knowing which situation makes more sense to pay with a credit card compared to a loan or line of credit.
In general, it depends on what you need the funds for, as well as how well you manage repayments and how much money you’re looking to borrow,” Bianca explained. With pros and cons for each option, Bianca has helped her clients make the right decision on which one to use.
When credit cards are a good option
Credit cards can be an excellent choice for certain situations.
They’re a good option when you need access to money for immediate spending,” says Bianca. “If you manage your card wisely and pay off what you owe by the payment date, it’s interest-free. Therefore, it can be a very convenient option when you need some immediate cash flow.”
For debt consolidation, making balance transfers to your credit card can be a great way to reduce the interest you’re paying on other cards. Most credit cards offer a very low, introductory rate on balance transfers, which can considerably reduce the interest you’re paying. However, to take full advantage of this you have to be disciplined and able to pay the total amount transferred within the time frame that the special rate is offered.
“And many cards also offer rewards points that can put cash back into your credit balance,” said Bianca.
Apart from higher interest rates, the flexibility of card payments is another consideration. “Credit cards only require a minimum monthly payment, so debt can grow quickly and indefinitely if you’re not staying on top of things,” Bianca explained.
However, by ensuring you make your minimum monthly payment and pay off your balance whenever possible, you will limit interest payments and debt.
When a loan is a better option
Loans have the advantages of lower rates and a set repayment schedule,” Bianca explained of this option. “You know exactly when your loan will be paid off and there’s no chance of overspending.”
Secured loans typically offer considerably better rates. “If you have money tied up in investments, like a GIC with a fixed term, you can use it as collateral and get rates as low as prime plus 0.5%.”
One disadvantage of loans is that they don’t have much flexibility. The payments are set so you must repay the funds borrowed and the interest within a certain term.
Some loans also charge penalties if you want to pay them off in full before the end of the term. However, at ACU you can make partial payments on the loans or payout the full amount at any time, without a penalty.
When a line of credit should be considered
Lines of credit are the best of both worlds when comparing loans and credit cards,” Bianca advised. “They offer rates that are usually lower than credit cards and have more flexibility than loans.”
For secured lines of credit, you only have to pay monthly interest on what you owe, while most unsecured lines require a minimum payment of just 3% of the balance.
There is a disadvantage, however. “If you’re not managing repayments well, you can end up with a large debt that takes a long time to pay off,” Bianca warned.
The bottom line: Which option is best?
Everyone should have at least one credit card,” said Bianca. “It helps you build your credit history when you use it properly.” And since cards are also good for short-term borrowing as long as you pay off the balance monthly, this can provide a great option for many people.
Personal loans are a good option if you are making a large purchase such as a car. “Loans can also be good for debt consolidation,” she explained. “Paying off your credit cards with a loan can save you a lot of money in the long term.”
As for lines of credit, they are ideal for emergencies. “A line of credit gives you immediate access to funds at a good rate,” said Bianca. “Once you pay off what you owe, you have access to those funds again.”
A good rule of thumb is that credit cards are a helpful option for short-term borrowing, but for large amounts and longer terms, loans and lines of credit offer lower rates.
If you need help working out the best credit option for your situation, contact an Assiniboine Credit Union loan advisor.