Using Credit cards as an alternative to loans

Credit cards lend money at a high rate of interest. This makes them a good way to borrow money at short notice and on a short-term basis, but not so good over the longer term. Loans are generally preferred for long-term borrowing. However, sometimes credit cards are a good alternative to loans even over the long term.

Loans tend to have a lower interest rate than credit cards for a number of reasons. Some loans are secured, which means that even if the loan goes wrong, the lender can still get their money back. With that margin of safety, most lenders are prepared to lend a higher amount at a lower rate of interest.

Another reason for a loan’s lower interest rate is the scheduled repayment basis, which reduces the administration costs for the lender. Finally, loans tend to be repaid over a longer period, which raises the total amount of interest charged even with the lower interest rate.

But credit cards have some advantages over loans as a method of borrowing. They are more flexible, which means they can be repaid more quickly, and in difficult months a lower amount can be tendered. They are not secured, which means the family home is not at risk. In fact, it seems the only disadvantage to credit cards, from the borrower’s perspective, is that high interest rate.

But even there, some credit cards charge an interest rate roughly equivalent to that of loans. These do have all the advantages of credit cards, but there are a number of features that need to be addressed.

The most important feature to consider, when selecting a low interest credit card as an alternative to a loan, is the interest rate being charged should remain low for a long time, preferably the lifetime of the card. Some credit cards offer a low interest rate, but only for the first few months the account is open, making it inferior to a loan for long-term borrowing.

It’s also important to be disciplined with these cards. Loans impose a form of repayment discipline with their structure and schedule, and a similar effort should be made with a credit card when using it as a loan. The card holder should make an effort to repay as much of the outstanding balance as possible each month.

Finally, if the credit card is chosen as a consolidation or balance transfer loan, there should be no spending on the card until the transferred balance has been discharged, as the spending will be charged interest at a higher rate. As well, if the low rate is on spending, there should not be a balance transfer made to the card.