If you apply for a personal loan, you can borrow up to £50,000. The good thing about personal loans is that you spread the cost in monthly installments over an agreed duration of time. This means that you know exactly when you should repay it and how much you will have to pay every month.
When it comes to the our options when we need to borrow money, we tend to think that a credit card loan is more expensive than a personal loan. Strangely, though, the cheapest credits cards usually undercut the cheapest loans. So, it might be a good idea to consider using a credit card to borrow the money you need.
How to Borrow With a Credit Card: Best Options
There are two ways you can do this (1) with a money transfer or (2) with a card that charges 0% interest rate. In the first case, the card firm issues a credit card for you that can do a bank transfer (pays money into your bank). Then, you need to pay back the money the card firm lent you at 0% (plus a small fee). Since you won’t need to repay a credit card in the same way as a loan, you do need to be very strict with yourself and also disciplined so you manage to pay back the money you borrowed and not pay a penny more than you what you owe due to late payment fees.
Note: Before you decide whether to apply for a credit card or personal loan, determine why you are getting a loan in the first place and how much you will need to borrow.
In this guide, you will find the most common situations where one may need a loan for and where having a credit card is more beneficial than getting a loan.
A Credit Card Is The Right Option For You If You:
- Need up to £5,000 – If you have a good credit score, the maximum amount you can borrow with a credit card is usually no more than £5,000. If you need more than £5,000, then a loan will probably cover your needs better.
- Can Clear the Credit Card in 32 Months – Most credit card firms offer 0% spending on a credit card for up to 32 months. If you are certain that you can budget to repay the debt within those 32 months, then go ahead and apply for the credit card. If you don’t manage to repay the debt within that time frame, you could consider transferring the debt to another card before the expiration of the 0% period (make this a last resort option).
- Want to Pay a Retailer That Doesn’t Take Credit Cards Without Getting a Loan – For the cases when the retailer doesn’t take credit cards, you can get a specialist money transfer card, which will allow you to transfer money from your new card to your bank account. Then, you can spend the cash as you would with a loan and just repay the card (plus a 3.45% fee for the transfer) over the next 32 months. Please note that there are also cards that give you debt at 0% for 25 months and let you do money transfers for 2% fee.
- Want to Make your Debts Cheaper – You will find plenty of balance transfer deals that will let you shift debts from other cards to the new credit card at a special cheap rate. That rate is usually much less costly than the cheapest loan. Most of the times, these are short-term 0% deals. The best case scenario? You make
- that are similar to what the loan would cost.
A Credit Card is NOT The Best Option If You:
- Need More than £5,000 – The credit limit of a credit card cannot be higher than £5,000.
- Want to Cut the Cost of an Older Loan – Older loans usually come with hefty penalties for moving. This means that although you pay less interest, you will eventually end up paying more overall if you move. So, switching to a cheaper interest rate is not always the best option to help save money. Our Loan Switching Calculator will help you decide whether switching loans is worth it.
- Can Get a Loan From Your Employer – Some employers offer up to £10,000 (some even more) to their employees as loan, usually for travel purposes (i.e. to purchase travel season tickets to commute to work). If your employer can give you such a loan, you can pay it back from your salary. It is the cheapest loan you can possibly get.
The Borrowing Money Bible: The 5 Golden Rules
For certain amounts, the cheapest credit cards can be by far a better option than the cheapest loan rates. Plus, they give you a much-needed flexibility to pay the debt back on terms that are more convenient to you and suitable to your requirements. However, if you want to make the most of a credit card, there are 5 tried-and-true, golden rules you should follow before you decide to apply for a cheap credit card loan.
Rule #1: Borrow Money ONLY If You Really Must
What you want to borrow money for matters a big deal. If you need cash to, say, renew your window treatments because the old ones bore you, stop right there. This type of borrowing will lead you directly to spending you can’t actually afford. Not to mention that you seriously risk getting into more debt in the future to repay an older debt (the one you are about to throw yourself into). Instead, use a budget planner and plan your purchases wisely.
Now, if you want to make a necessary (planned) purchase, such as the family’s first car, try to borrow the lowest amount of money you need for that purchase and make sure you can repay the debt within the 0% promotional period ends.
- To cut the costs of an existing debt using a credit card, you can consider special balance transfer credit cards. They will allow you to pay off existing debt (credit and store cards) at 0%, for a small fee. That way, your repayments will not cover the interest, only your debt, which means that you will be free of any debt quicker.
- To make an existing personal loan cheaper, watch out for switching loans penalties, especially if the difference in interest rate is not all that significant.
- To make a big, one-off purchase, it is always best to use the card(s) with the lowest interest rate possible or the longest 0%. For a big purchase, you will also need a card with a large enough credit limit. Bear in mind, though, that credit cards are not accepted as a payment method by all retailers.
- If you want to borrow a large sum (more than £5,000), say, to buy a car from a retailer that doesn’t accept credit cards. For smaller amounts, you can use money transfer credit cards.
Important Note: It is critical to understand all the details correctly before you proceed with getting a credit card or personal loan because a mistake could deliver the exact opposite results. So, please make sure you read through the whole of this guide carefully and meticulously.
Rule #2: Do NOT Add Further Spending
Since you have a limited time to repay the debt (as long as the 0% promo offer lasts), it is crucial not to add further spending to the card. Otherwise, you will need to readjust your monthly repayments, which, in turns, will force you to stretch your budget. Then, chances are, you won’t be able to stick to your budget and benefit from the 0% period the most. So, once you have spent your loan amount, better lock the card away and keep it out of sight until, at least, you have repaid all your debt.
Now, about spending on a money transfer card, it is strongly advised to refrain from doing that because 9 out of 10 times people end up paying a typical 20% interest rate on the purchases they make using a money transfer card. Yes, the lender will prioritise repayments to the most expensive debt. We like that. But, it will take you some serious time to pay off the card completely.
Rule #3: Set Up Structured Payments
The best idea when you have used your credit card is to treat it like a loan and pay it off in fixed, monthly installments so you can clear your debt in a specific amount of time. The easiest way to achieve that is to set up a direct debit and, of course, remain loyal to this decision.
When it comes to the sum of those monthly installments, although it may be tempting to pay less (considering that credit cards give you that kind of flexibility), I suggest you don’t do this. All you will accomplish by depositing less money is to pay much more interest and drag repaying your debt for an unnecessarily long time. And, if you do need to pay less, try to keep it short (only for the period of time necessary) and, please, not make it a habit.
Note: Always pay, at least, the minimum repayment of the credit card, which is usually around 3% of your outstanding balance. Though, it is much more preferred to try to pay more, if you can afford it, of course, especially in the first few months, when the debt is bigger. The point is to pay off the card loan the quickest possible without having any penalties for it. That way, you pay less interest and get rid of debt fast.
Rule #4: Repay The Debt Before The End of The 0% Period
As soon as you are accepted, set up a direct debit. Make sure the amount you pay is, at least, the minimum repayment. Don’t get carried away by the fact that it is a low rate or even a 0% card. You do need to make repayments every single month. The goal here is to benefit from a cheap deal. The only way you can do that is by ensuring you don’t miss a repayment and get it all over with before the 0% period ends. Otherwise, the APR will increase and you will need to pay an extra £12 fee. Not to mention the interest, which will climb to a soaring 18.9% after the 0% is over.
Rule #5: Know Your Deal
Sometimes, the headline offers are tricky. They advertise a 26-month 0% spending card but what you eventually get is a totally different story. I mean, yeah, you might get exactly the deal advertised if your credit score is nearly perfect. But, you may as well be given 20 months at 0% if you are accepted. This mostly has to do with your credit score and, consequently, your credibility in the eyes of the lender. The poorer your credit score, the more risk lenders see in your case.
If your credit score meets the minimum criteria of the card provider, chances are you will be accepted for the card. However, the offer will be different. For example, you may be given a card with a higher APR or a lower number of months at 0%. Unfortunately, there is no foolproof way to know what deal you will end up getting before you apply.
0% Money Transfer: Turning a Card Into a Loan
Having a credit card that allows you to do money transfers is a significant ally in repaying debt, especially for loans of less than £5,000, which is the typical credit limit most people get. You simply use the card to shift cash into your bank account and then owe that amount to the card, instead of the bank. Just try to find a card that offers such transactions at a low interest rate.
The trick here is to NEVER withdraw cash. So, ask the card provider to do a money transfer to your current account (you will be charged a special promotional interest rate for it) and refrain from spending on the credit card. Otherwise, you will most likely lose the special deal and be called to repay your debts with 20%+ APR. To stay on the safe side, I suggest you make the minimum repayment every month (if you can’t afford to pay more than the minimum), as mentioned above. Don’t forget that it is critical to repay the debt by the end of the 0% (or whatever low-interest) deal.
FAQs: Credit Card Loans
Q: Can I cut the cost of an existing loan with a card?
A: Yes, you can. I suggest you do it with a money transfer card, provided your loan is up to £5,000 and the money transfer fee and rate of interest (if you haven’t found a 0% deal) are less than the cost of the interest on the loan you have. In this case, you can use the cash paid into your bank account from the credit card to pay off the loan. Now, if your loan is higher than £5,000, it might be much more difficult to find a credit card with a credit limit that meets your requirements.
Important Note: Please read through our guide and use money transfer cards exactly as suggested here to avoid making a mistake that could cost you big time.
Q: What happens if I don’t manage to repay the card at the end of the 0% deal?
A: If you had managed to repay within the 0% spending card promotional period, you could possibly borrow again for free. Now that you haven’t, it all depends on your credit history. With a decent one, you could transfer the remaining debt onto a 0% balance transfer card (if one is available at that time). Then, follow the steps suggested in this guide and repay the debt before the expiration of the 0% deal.
- Most top balance transfer cards do not have a promotional rate on spending. For that reason, it is suggested you don’t spend further on the card.
- Make sure you move the remaining debt onto another 0% spending card before the promotional 0% period of your previous card ends. The interest rate after the end of the promo period can be devastating.
- An all-rounder card is your best alternative is you want to borrow more money or combine a 0% balance transfer card and a 0% spending card in a single card but don’t want to take out a new 0% spending card.
Q: I need more money. Should I apply for another credit card?
A: As highlighted above, it is likely you get a lower credit limit than what you have asked for. Unfortunately, there is no way you can know that for sure before you apply. This is because lenders take into consideration factors, such as your credit score, to determine your profitability, and then give you a credit limit accordingly. If you end up not getting the maximum credit limit you expected, I suggest you don’t apply for another card because every time you apply for a card your credit score is affected. Instead, use whatever limit you have been given and ask for an increase after a few months.
Q: I want to withdraw cash on a credit card. Is this wise?
A: Please note that such cash withdrawals are recorded on your credit report (not to mention that they are expensive). If you do this often, lenders may take it as a sign that you are in desperate need for money and that you don’t have any cash in your current account. Adding the fact that you are willing to pay the high interest rate for some cash, you can understand that things won’t look good for you and your credibility should you need, say, a personal loan in the future.
Q: Are specialist cashback sites a good option for me if I need to borrow money?
A: I would say yes, because they usually pay you when you sign up to financial products on their website. However, nothing is 100% guaranteed with these websites until the money is in your account. Just be careful before you sign up to any financial product as cashback terms may vary significantly between applicants.