Are Credit Cards Better Than Payday Loans
With so many online financial products and companies it can be hard to know whom to trust. Therefore, it is important that you thoroughly research to find the best choices. There are various options available today that you can use whenever you need to borrow money to buy or pay bills, which includes credit cards, payday loans and other forms of credit. Considering the difference between credit card debt and payday loan debt is necessary before you take any decision. It is recommended that you only borrow during emergency.
Upon approval against a payday loan, you get the approved cash deposited into your bank account, which means the money that you borrowed is ready to spend through the debit card. While, a credit card acts like a debit card but you have to borrow the money at the point of sale. Thus, you can use your credit card to make purchases and bill payments online or over the phone.
Credit card cannot be used to make payments for Direct Debits. If you need to cover any direct debit then you will have to first transfer money from your credit card to bank account. Usually, there are extra fees and charges associated with such transfer and cash withdrawal.
Before applying for a payday loan you should first understand the costs associated with it. In UK, payday loan lenders will only charge interest of 0.8%. So, per £100 you will have to pay 80p. Default fees are generally capped at £15. Generally, you will never have to pay back more than double of what you have originally borrowed regardless of APR. Payday loans needs to be repaid back within one month. You might also be able to opt for short-term instalment loans that can be borrowed and paid back over up to 6 months.
On the other hand, you can find credit cards offered with 0% interest. So, you will not have to pay more than what you borrow. You can also find credit cards offering 0% balance transfers. Yet, most of these cards will have a balance transfer fee. You can at times negate such fee by switching providers. By making your balances in full every month you can avoid paying interest. But if you miss the payment deadline and you still have credit card debt then you will be subject to the usual fees and charges.
Typically interest rates for credit cards are around 18.9%. Getting approval for a standard credit card may be difficult for people who have a poor credit rating. Credit cards for poor credit often have an APR from 30% to 60%. So, when you borrow £100 on a credit card with an APR of 18.9% you will be charged £1.48 of interest in the first month. So, if you have made a payment of £5 each month, by the time the debt has been repaid you would have paid £20 in interest in two years. If the card charges 60% APR, you will have to pay £105 in interest and you will have to pay back your credit card debt back in 3.5 years. The interest would total £4.68 in the first month.
So, considering the monthly interest rates, credit cards are cheaper compared to payday loans. Yet, if you are borrowing money using your credit card, you need to be very strict and disciplined. All your cost could easily mount up if you fail to repay what you owe in time. Besides, the interest rates will keep multiplying monthly.
Credit cards costs have no limits, while payday loans have limits and ensure you never have to pay back more than double what you have borrowed. The amount of credit card debt that you have could keep growing until you have reached your credit limit and can rise even further.
So, in short, if you can discipline yourself, a credit card may be a lot cheaper than a payday loan. But if you are likely to get tempted to spend the credit available, then you need to be cautious.