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Borrowing money: Loans vs. Credit Cards

Despite clear signs that Britain is coming out of the double dip recession, many are still feeling the full effects of the increased cost of living. Some people have managed to cope simply by reducing their outgoings and dropping luxuries out of their budget, however for many this hasn’t been sufficient to compensate.

When this is the case, borrowing money may seem like the only legitimate option available. Despite its bad rap, borrowing money in the form of loans and credit cards isn’t inherently bad, it’s just important that you get the correct product to fit your individual needs.

Throughout this article we are going to discuss how each credit product is designed to help certain financial scenarios.

Small flexible amounts

If you’re looking to purchase something like a laptop or are looking to spread the cost of the expensive Christmas period then a credit card may be the best option for you. There are a number of different types of credit cards each designed to help in different financial situations. If you are looking to spread the cost of a purchase then a 0% purchase card will be the one for you. These cards allow you to carry out transactions and then pay no interest on the outstanding balance for an introductory period.

If you are looking to earn cashback on purchases then a rewards card will be the best option for you. These offer introductory deals that entitle you to up to 5% cashback on transactions. However, in order to get the most out of these cards you need to ensure that you are able to repay the balance in full each month otherwise you could find the interest you are being charged is outweighing the cashback you earn.

Debt consolidation

The most suitable product for debt consolidation will be dependent on the amount you owe. If your debt is mainly store card or credit card related then a 0% balance transfer credit card could prove the best option for you. These allow you to transfer the balance of existing credit or store cards on to these and then pay no interest on the outstanding balance for an introductory period. Currently the market leading balance transfer card offers a 30 month interest free period which means you have 2.5 years to pay off the balance before you start accruing interest on the balance. Please note you will have to pay a small balance transfer fee however this is only like to be 2-5% of the total balance. Much like the 0% purchase cards, if you ever fail to make a payment you will lose the 0% interest deal.

If you’ve got debt from various sources including store cards, credit cards, payday loans and even utility bills then a personal loan may be your best option. You can use the loan to pay off each source of debt and then organize it all into one monthly payment. The problem is, if you’ve missed payments on credit commitments in the past then your credit rating isn’t likely to be great meaning a bank personal loan will be out of the question. In this situation sub-prime lenders offering products like guarantor loans, logbook loans and installment loans may be your best bet. You will notice that these types of loans will have considerably higher rates of interest than banks and mainstream lenders however this is just to compensate for the credit risk of the customer that they are lending to.

Conclusion

When used for the correct purpose, loans and credit cards can be very helpful tools for your finances. It is essential that whatever you choose you manage it in the correct fashion and never miss any payments.

Providing you do manage your commitment aptly you may also see your credit score rising, further increasing your chances of being approved for low rate credit in the future.

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