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Financial Education

Financial Fitness Tip

Personal Loan or Credit Card: Which is Best for Your Situation?

Paying cash for large purchases is the ideal situation. However, we understand that a large sum of cash may not always be an option. We also understand that life happens, and that you might not be fully prepared to cover the expense with cash. In these cases, you may likely go to your credit card as a safety net. While each situation is unique to every member, there’s a time when it makes sense to use your credit card, and there’s a time when a personal loan fits better into your plan. Below are some guidelines to help you determine what’s best for you and your finances.

Personal Loans

Personal loans can be used for a number of different items such as home improvement projects, debt consolidation, a vacation, medical expenses and more.

A personal loan charges you a fixed interest rate for a fixed period. Your payment may be larger than a monthly credit card payment because it’s for a fixed period and includes both principal and interest amounts. The repayment period can vary and enables you to work out a repayment plan that fits into your budget while erasing your debt. Most personal loans will not charge a pre-payment penalty, so you can pay the loan off early and save money on interest in the process. The downside to a personal loan is you do not have credit readily available to you, unlike a line of credit or credit card.

Credit Cards

If you’re able to pay your balance in full each month or need to have access to a revolving line of credit, then credit card may be your best bet. If you’re looking to consolidate, a credit card with a low-rate balance transfer for a set amount of time can be beneficial as long as you pay off the entire balance before the introductory rate goes away.

Credit cards can also offer the ability to earn rewards such as cash back, airline mileage and more. These rewards are tempting to the consumer, but these cards can often carry very high interest rates. Be sure to review all terms and conditions of any credit card you sign up for. These rates are often variable rates and can change over time.

Credit cards also only have a minimum required monthly payment—usually 2% to 3% of the outstanding balance. With this repayment plan, it can be tempting to only pay the minimum amount due. However, this means interest will continue on the outstanding balance and could make paying this debt difficult in the long-term.

Another thing to focus on with a credit card is how much of your credit you are using. Just because you have a $5,000 limit, doesn't mean you should carry $4,000 in debt. The lower your credit utilization, the better your credit score will be.

While personal loans and credit cards both carry pros and cons, it’s best to fully review your current and long-term financial situation to determine which method is the best for you and your finances.

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