Candice Dicki
Have you ever had a financial emergency that led you to consider borrowing? Have you ever applied for quick loans online, like a payday loan or a bad credit loan, just to tide you over?
We’ve all been there.
Credit can be a helpful tool when used wisely. Of course, it’s important to understand that borrowing often comes with costs, such as interest and fees. And we know how hard it can be to stay calm and make the “rational” choice when you’re in the middle of a crisis, weighing up whether to use your credit card or take out a short-term loan.
That’s exactly why we’ve put together this simple comparison of two popular credit options, to help you make an informed choice based on your needs—not someone else’s.
After all, every financial situation is different. There’s no one-size-fits-all approach when it comes to borrowing. What matters most is being informed and confident and choosing the option that works best for you.
Let’s dive in!
What is a Credit Card?
Let’s start with the basics. Credit cards are revolving credit facilities that allow you to borrow or spend up to a certain predetermined amount. This means you have a set lump sum amount that you can use, repay, and reuse over and over.
Credit cards have different features that make them extremely enticing and convenient for borrowers. These include:
- You are allowed to transfer any remaining credit balance from an existing credit card or loan account to a credit card with comparatively lower interest rates for a fixed period. Although you might be levied a nominal fee.
- Certain credit cards also offer you air miles, points, rewards and cashback on using them.
- With credit cards, you only need to make a minimum monthly payment. Failure to do this might lead to the imposition of fines and interest, directly affecting your credit score.
What is a Payday Loan?
Payday loans usually amount to less than £1,000 and are generally meant to tide you over until the next payday. The borrowing tenure for a payday loan is for a few weeks to a month.
Payday loans have a high interest rate, which the FCA has capped at 0.8% maximum daily interest. However, the best part of payday loans is that you have immediate access to cash since these lenders usually do not undertake stringent checks and are more lenient with their approvals.
Some lenders can disburse funds within just a few hours, making them a convenient option in urgent situations. However, it’s important to stay on top of repayments, as missing them could lead to a cycle of debt that becomes difficult to manage.
Some common alternatives to payday loans include bad credit loans, emergency loans, and Buy Now, Pay Later (BNPL) services. Each comes with its own terms and considerations, which is why it’s worth taking the time to understand which option best suits your situation.
When to Use Credit Cards or Payday Loans?
Now, coming to the most important question, under which circumstances should you choose credit cards over payday loans and vice versa?
Payday loans should be chosen when you are in an emergency and require immediate financial help. This includes emergencies when you do not have access to more traditional borrowing options like credit cards or personal loans. You should never use payday loans to pay for a holiday or festive shopping (these are things you should save towards), as payday loans often have 1000% APR.
Credit cards provide a more relaxed and flexible repayment option; you can pay them over a few months, given that you make the minimum payment each month. Payday loans need to be paid back in full within a few weeks unless you want to get caught in a debt cycle.
If you conduct thorough research, you might find credit cards offering an initial interest-free period (given that you make the full payment each month). This essentially means you are borrowing without paying any additional interest.
Credit cards can also be chosen over payday loans when paying for everyday expenses like recurring bills, groceries, and even for your entertainment (movie tickets or restaurant bills). Credit cards are also a great way to improve your credit score. When you use less than 30% of your credit limit and make monthly payments, you can see a positive impact on your credit rating.
Final Words
Choosing between credit cards and payday loans completely depends on your individual circumstances. It’s best to always aim for a credit option with the lowest interest rates; however, sometimes time is of the essence. In such a case, a payday loan comes to your rescue.
With credit cards, you might often be tempted to spend more since banks will usually provide you with a higher credit limit. For instance, if you need to spend £200 a month to pay for your necessities, but with a £5000 credit limit, you might be persuaded to spend on things that would probably not be necessary. This can make it difficult to stay on top of your repayments, making you incur fines and interest.
The best way to deal with financial emergencies is to plan for them. It’s a good idea to have an emergency fund that can come to your rescue during cash shortfalls. Following a budget will help you allocate money towards your emergency fund despite the ongoing cost-of-living crisis.
When it comes to taking out credit, doing your research to find the best borrowing terms and avoiding fraudulent websites will help you stay financially responsible.
