Using A Credit Card As A Loan – Is It Possible?

Worried about paying your credit card debt? This article is here to help.

Each month, over 170,000 people visit our website to learn about ways to handle debt. We are experts at explaining debt and ways to handle it.

In this article, you’ll find:

•  How to use a credit card as a loan.
•  The best ways to borrow money with a credit card.
•  How to use a credit card in a way that is good for you.
•  The effect of using a credit card as a loan on your credit score.
•  How to make sure you can pay back your debt.

We know dealing with debt can be hard. But you are not alone. We’ll guide you through your options and help you find a way that works for you.

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 0% deals. The best case scenario? You make that are similar to what the loan would cost.

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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.

Remember:

• 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.

What Credit Cards Can I Get?

There are lots of different credit cards available so knowing what is right for you can be difficult. You can contact a debt charity for some advice if you need it.

Here is a quick breakdown of the different cards available:

• Reward cards: This card will give you rewards when you use it. These rewards can be anything from air miles to store discounts. These cards can have high interest rates.
• Credit builder cards: These cards could be a good option for those who want to build a positive credit history.
• Balance transfer cards: You might be able to reduce your total interest by combining your credit card debts onto one card.
• Purchase cards: These cards can be a good option if you need to make a big purchase but they do have strict criteria to qualify.
• Money transfer cards: A transfer card essentially lets you borrow money. You transfer money from the card to your bank account and usually pay a small fee.

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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

References

CONC 13.1 Application

CONC 2.1 Application

CONC 5.2A Creditworthiness assessment