Credit cards or loans – which is better?

10th May 2012  

It’s official. We’re apparently in a ‘double-dip’ recession and even though it’s being reported as only a ‘technical’ recession as opposed to a ‘real’ one, is now really the time to be thinking about taking out a loan? And wouldn’t a better idea be to put those essential purchases onto a 0% on purchases credit card?

With so many cards offering tempting zero-rate introductory periods for up to 15 months, the usual worry that the interest charges on a credit card will cost you a small fortune are a moot point. To counter the rise and rise of 0% on purchases credit cards, banks have been offering some pretty tempting deals on loans recently, and the battle between the two seems to be hotting up. So which is better?

Personal loans – tried and tested

Currently, you’ll pay around 6% for the cheapest personal loans, providing of course that you have a spotless credit record. To tempt in new customers, loan providers have been having a bit of a fire sale, slashing rates to encourage new borrowers to take advantage of a fixed rate term. Sainsbury’s continued move into the financial sector has led the way, with 1-3 year loans coming in at a very attractive 5.9%. If you borrow £7,500 over two years with the supermarket giant, the total cost of the interest would be just £457.

But – and it’s a big but – the less you borrow, the less attractive the rates become. Drop down to a loan of £5,000 and the interest rate goes up to 7.6%. If your credit rating is anything other than ‘excellent’, you could be looking at 17% interest charges, and that could up your interest payment to £859.

Credit cards – little and often?

Credit card providers are in the middle of a bumper give-away bonanza for new clients. If you were thinking of taking out a loan to pay off existing credit card debt – stop for a minute. Have you thought about a balance transfer credit card? A 22-month interest-free period from Halifax or Barclaycard carries a transfer fee of just 3.5% and 2.9% respectively, and that’s a one-off payment too. After that, you’re free to clear as much of the outstanding balance as possible, with none of your payments being gobbled up in interest charges for the best part of two years.

New purchase credit card deals are also plentiful at the moment, with cards from Nationwide, Barclaycard, Halifax, NatWest and others all offering 0% interest for varying amounts of time. So doing a quick ‘back of the envelope’ calculation may indicate that if you’re looking to borrow a small amount over a short period of time, then the credit cards could come out on top.

There’s even a clever hybrid mix of the two called a credit card loan, read our guide to learn more.

But, just like all forms of borrowing, there is a downside to this smorgasbord of temptation. If you do use a credit card to balance your budget, you need to be extremely disciplined about it. There’s no point paying off the absolute monthly minimum and being left with a debt that will start to accrue interest at the end of it. You also need to have an excellent credit rating to be able to take full advantage of the all these offers from the lenders. Anything less and you’re looking at high interest rates from the start.

So the question of which is better, a loan or a credit card, can only be answered with a slightly lacklustre ‘it depends’. A loan is a locked in agreement that will help you resist the urge to spend more than you can afford to pay back. A credit card is a little more flexible and, consequently, a little more tempting. If you can’t resist the urge to splurge, then your best short term bet will probably be a 0% on purchases cards.


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