When it comes to buying something you either want or need, it can be tempting to reach for your credit card first to pay for it. There are times when it is beneficial to use your credit; after all, if you use it wisely, you can not only make your purchase but also grow your credit history and improve your credit score. But there are times when it’s probably better for you to get a personal loan instead of relying on plastic. How do you know when to use your card and when to apply for a loan?
Generally speaking, knowing when to use a credit card and when to get a loan depends on the amount of money you need to spend. Most credit cards have a set limit in terms of how much you can borrow. Unless you have great credit, your credit card company may not offer you much more than a small credit limit of anywhere from a few hundred to several thousand dollars. If you are in need of more money than that, you could run into trouble with your limited borrowing power. In addition to a low credit limit, you could also be faced with high interest rates and late fees and penalties if your purchase turns out to be more than you can financially handle.
If you’re careful with your personal finances, and have great or even excellent credit with high spending limits, then it might not be a problem for you to make a larger purchase. If you’re considering something with a larger price tag — like home improvements, a vacation, or a wedding — you may be better off taking out a personal loan.
As a personal loan is set at a fixed amount and terms, you can plan out your spending and your use of the money. You can also research your lender options and find the best loan at the lowest interest rates. This means saving money in the long term. In addition, there’s no so-called “sticker shock” when it comes time to repay your loan. Credit cards tend to surprise even the most careful shoppers with accrued interest – unless the cards are paid off in full each month, that is.
If your credit scores are in the bad or poor range, it may be easier for you to obtain a loan than to use a credit card to make a larger purchase. There are many lenders in the market today who specialize in loans for people who don’t have the best credit. Also, there are lenders who also offer unsecured personal loans. This loan type means you don’t have to put up collateral in order to get the loan you need, so you’re not risking something you own, such as a home or a car.
When making smaller purchases that you can easily manage repayment on, credit cards can be ideal. So long as you have good financial discipline, you can pay off the balance and avoid interest payments and other fees. For larger purchases, a personal loan may be easier in that there are monthly payments set out in advance. These payments include both the capital and the interest on the loan, so it’s a set number you agree to and can plan for. The larger the amount of money you need to spend, the better a personal loan will be for you in the long term.