Credit Card or a Loan?
IT IS the twelfth round and both fighters are on the ropes.
Credit cards, popular with the crowd, have been through a lot of fights and are a little punch-drunk.
Personal loans may not be as popular but their lower interest rates are keeping them light on their feet.
OK, it’s not quite a sweat-laden title fight, but you can win if you know their game plan.
Why a credit card
Australians had 12.3 million credit cards in their wallets in July, carrying $40.4 billion of debt. We clearly like them, Zobel Finance manager Simon Burgess says.“They are there to assist with everyday lifestyle costs and having $5000 should you need it,” he said.
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Community CPS Australia chief executive Kevin Benger said lenders charged higher interest rates on credit cards to cover the risk of default.
“Higher interest rates on your credit card can vary between 19 and 30 per cent, but you are paying for the flexibility,” he said.
The trick to avoiding credit card tragedy is to play it smart. AMP financial planner Darren James suggests the traditional method: always pay off your balance before the end of the month.
“There are a number of wins here. You will be able to reduce the number of transactions you make per month and avoid bank fees, you will also get better returns from your card’s rewards program and if you have got an offset mortgage account, more money will be left in your account to be busy paying off your debt,” he said.
“If you can’t budget, you really should cut up the credit cards.”
National Australia Bank’s state general manager of retail banking, Ann-Marie Chamberlain, said borrowers could save themselves money by understanding why they wanted a credit card.
“It is worth considering the interest rates on purchases and cash advances, the number of interest-free days on purchases and whether you want a rewards scheme attached to your card,” she said.
So if you know you will pay off the balance every month, ignore the higher interest rate and go for a longer interest-free period.
A card with a rewards scheme may also be attractive if you never have an outstanding balance.
If you don’t always pay your card off, think about a card with a lower rate, which may have a shorter interest-free period but may cost you less in the long run.
Also take a look at annual fees, which may end up costing you more than your cheaper interest rate. But if you’ve just found that mint-condition 1957 Goggomobil you’ve been after for some time, don’t reach into your wallet for your credit card. It is time for option number two.
Why a personal loan?
Personal loans can help stretch repayments on a larger purchase over a longer period of time.
hey can also be used to consolidate several outstanding credit cards to pay a cheaper interest rate – provided you cut the cards up.
NAB’s Ms Chamberlain said personal loans financed purchases between $5000 and $80,000.
“Think about how long you want to take to repay your loan and whether you prefer weekly, fortnightly or monthly repayments,” she said.
“If you choose a fixed-rate loan, you will know exactly how much your repayments will be. However, you will miss out on any benefit if interest rates fall. If you choose a variable-rate loan, you will benefit from any fall in interest rates. However, if rates move upwards your repayments will be higher.”
While personal loans are certainly not new, Community CPS’s Mr Benger said there had been a trend away from the facility.
“The old personal loan has . . . gone out of fashion a bit because people have used equity in their home to do things,” he said.
“But that can be a bit of a trap. You can end up putting a car loan on the house and you are paying it off over a much longer period than a personal loan. The rate may be cheaper but you may pay a personal loan off a lot quicker.”
Personal loans are targeted to short-term credit – a few years at most, compared with the monthly time horizon for credit cards.
But there may be cases where personal loans might edge out credit cards over that period, AMP’s Mr James said.
“Merchant fees on credit-card payments also can make it more attractive to take out a personal loan when purchasing big-ticket items,” he said.
“Taking out a personal loan to pay by cash could get you a better deal than paying by credit card.
“Personal loans also will generally have a lower interest rate than credit cards, although there are exceptions.”
The big differences
CREDIT CARDS
* Higher interest rates
* Very flexible and easily accessible
* Debts can mount quickly and can encourage impulse spending
* Paying minimum repayments generally covers interest and does not reduce debt
PERSONAL LOANS
* Lower interest rates
* Good to use for large purchases from $5000
* Repayments can be set and can be easily budgeted but are generally higher because you are repaying the loan and not just the interest
* Can consolidate small debts
Source: News.com.au
For compare personal loans or credit cards visit: www.credit-card-offers.com.au
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