When Does a Personal Loan Replace the Use of a Credit Card?
We are living in an era of plastic money. At times when you don’t have the required cash in your wallet or even in your account, this plastic currency is of great help.
For most people, the major benefit of using a credit card is the time span within which you get the required amount and saving yourself from the process of applying for the loan. You can just use your credit card to pay the bill and repay the used amount later in installments. However, is it actually the best option in comparison to a personal loan?
Here is the answer:
Using a credit card and not making timely repayments may land you in a debt trap. Doing this will severely affect your CIBIL score. Getting a personal loan in India can be much wiser instead.
Here are three situations where availing a personal loan ranks above using a credit card:
Credit card is a debt trap
The biggest ‘drawback’ of having a credit card is the 24/7 access to easy money, which makes it easy to get into the debt trap. You might have all the intentions of repaying the full debt on time, but there can be circumstances when you are not able to do so on the due date. All time access to credit can make you a credit dependent person, and you may be tempted to spend even the last remaining amount limit on you card.
At times you might take help of your credit card to buy something urgently needed but when you know the withdrawal limit of your card you might end up buying the expensive alternative of the same required item. For example, you need a smartphone and think of buying it with your credit card, and when you get to know that you can withdraw more than what is required, you might end up buying the most expensive phone that you can afford.
At such times, a personal loan can be a smart choice to consider. You will only get the amount that you ask for and will spend it on the thing you availed the loan for; thus restraining yourself from overspending.
The Annual Percentage Rate (APR) on a credit card balance is anything between 36–43% as compared to a personal loan, which is 14–18%. This makes a personal loan a cheaper option.
Get a credit card and make your CIBIL score go down
Let’s explain this point with an example: You need to renovate your home, and the renovation expert or interior decorator says that the bill for the work will go up to INR. 70,000.
Now you have the choice to pay the bill through a credit card, but doing that will increase your card utilisation ratio by 80%; which will bring you very close to your credit limit. Having a high utilisation ratio makes your CIBIL report negative.
However, if you avail a personal loan for the same thing, which is lent on the basis of EMIs, you will be making timely payments. This, in return, will improve your credit score.
Credit card means welcoming the unpleasant surprises
Not doing a thorough research while getting a credit card can be an invitation for some nasty surprises.
The lender might charge you higher and you might not even know if you are being charged a fixed interest rate or a variable one. With changes in the economy, interest rates may rise, making your credit card cost much higher suddenly.
If you’re expecting a major expense, taking a personal loan (at a fixed interest rate) can be a better choice. With a fixed rate of interest, your EMIs will remain unaffected and unexpected surprises will be waiting for you.
After knowing these benefits of a personal loan over a credit card, we are sure will make a smarter choice.
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