Why a Credit Card May Not Be the Way to Pay
12/1/2022
2 minute read
Why a credit card may not be the way to pay
Credit cards can be an easy way to make purchases. Some cards come with benefits like rewards, cash back, or travel points. If you stay on top of your payments and keep credit usage low, you may also be able to improve your credit score. However, this type of credit can also have big drawbacks that outweigh the benefits. Read more to find out how credit cards work and why they may not be the best option to access the funds you need.
How credit cards work
A credit card is a line of credit from a bank with a limit or cap on what amount you can use. The lender bases your credit limit on criteria such as your income, credit history, and debts, among other things. One of the big differences between a credit card and a loan is that a credit card is revolving credit. That means you can access your credit line (up to your limit) at any time and repay the amounts you’ve borrowed either all at once or over time with interest charges. But your credit line and any amounts you owe revolve, or are carried forward, from month to month.
Repayment and debt
Every time you buy something with your credit card, that amount is subtracted from your credit limit. You pay back the borrowed amount, and your available credit balance goes back up. If you don’t repay what you borrowed by the end of each billing cycle (monthly due date), an APR, or additional interest amount, is added to what you already owed. This APR is almost always variable, so it can rise or fall depending on the economy’s health.
You can opt to make minimum payments, which are a percentage of the total you owe, but you will still owe the rest of the balance plus interest and fees. Putting off paying what you owe can quickly sink you into more debt as the amount compounds. Plus, if this information is reported to the credit bureaus, it can negatively impact your credit score. This is because it affects your credit utilization ratio or the percentage of total credit that you’re using. The amount of debt you owe, which includes credit utilization, makes up a whopping 30% of a FICO® score.
Credit cards can put you in a bad financial position
During a recession, variable rates go up. If you miss or get behind on payments, you may get stuck in a cycle of debt that is difficult to get out of. The high, variable rate will make it harder to pay off an ever-increasing balance. There are annual and late fees that add up as well. Consequently, credit cards are also not a great choice if you need a large amount of money fast, if your credit history isn’t great or if you often max out your credit limit.
Benefits of personal loans
Personal loans, on the other hand, have fixed terms, payments, and interest rates and could be the right option to get the funds you need. You know how much you’ll have to pay in total upfront. During uncertain economic times like a recession, this can be a big advantage. It’s predictable and easier to fit these payments into your budget. You’re likely going to pay less in interest, too.
We can help you find your loan solution. Get started online or talk to a Lendmark loan expert at your local branch.
