The lending industry is full of questions, concerns, horror stories, success tales, and comments. One person may tell you to get as many cards as you can as fast as possible, but another will tell you to stick to loans whenever you absolutely need to.
One thing we can all agree on? Everyone needs a credit score, and preferably a good one. So how do you achieve that?
Personal Loans VS Credit Card to Repair Your Credit
Credit is a scary thing. It can determine your quality of life, what car you get, where you live, or even how much money you can get in an emergency. Having poor or building credit is basically putting you at a lower chance for quality.
There are ways to change that FICO score, though! Many people sign up for a credit card to start building or improving their score, but did you know there is an even better way to get that number shooting upwards to 800?
A personal loan can help build and repair credit in a way that is safer than a credit card, more reliable, and comes with a lot more options. It’s also easier to get approved for a decent loan with bad credit than a card.
Understanding The Differences
Loans and credit cards both affect your credit score, but they work to achieve two different things. Personal loans are created with a long-term goal in mind, whereas a credit card is a replenishable pool of credit. Short-term monthly needs are best for a credit card, or so that is how it is marketed.
Many people use a credit card for big purchases when they could have just taken out a loan instead. Loans look better on credit history, and you aren’t going to pay a bunch of interest for a large amount. When you get a personal loan, you have many months to pay it back.
Credit cards want immediate payments, and if you don’t, you’re slammed with the interest fees. The longer you are in considerable amounts of debt, the worse your credit score looks! See where this is going?
It also doesn’t look good for a credit score if you have multiple cards open on your account, especially if they’re close to being maxed out. One large personal loan is a lot more responsible than 5 small dollar cards with full balances.
How Can A Personal Loan Help Your Credit Score?
A lot of factors go into your FICO scorecard. Your length of credit history, your late payments, the utilization rate, and more. Both credit cards and personal loans can count against your credit score, and both can help heal them.
So, why are loans a better option? They’re safer and more reliable and they look a lot better to someone conducting a credit check. Loans are approached differently than a credit card.
Since loans are considered long-term options for borrowers, it hurts your score less if it takes 12+ months to repay the full debt. A credit card as the opposite effect. If it took you a year to pay off a card debt, your score will suffer much more than if it were a debt from a personal loan.
Loans also can help you show incredible responsibility if you keep up with payments. On-time payments will greatly increase your score, and it’s a lot easier when the debt keeps going down. Credit card companies make it easy for you to keep the card maxed out, so having months with a high utilization percentage is extremely harmful to your score.
With a personal loan, you can prove to those checking out your score that you can handle the responsibility of on-time payments, big dollar amounts, long terms, and commitment. Credit cards won’t say that about you unless you’re one of the rare few who can keep it paid off perpetually.
Can You Use A Personal Loan To Pay Off A Credit Card?
If you’ve already made the mistake of jumping hard into the world with a slew of cards, it’s not too late. Debt consolidation loans are a great way to start repairing your credit even if you’re thousands in debt from credit card usage. Owing to one company is a lot better than being in debt to several for your score.
This is why credit cards should be avoided – they are too easily abused and the temptation is much stronger with a sleek plastic card. You can repair these damages, help your score, and stay on top of your finances with a personal loan for consolidating that harmful debt.
Why You Should Avoid Credit Cards And Choose Loans Instead
Despite being the most popular source of borrowing in the USA, credit cards are also the most expensive. Unless you can afford to continually pay off your credit balance in full every month to avoid paying steep interest charges, you’re going to be snowballing down a landslide of debt from the first minimum payment.
It’s true that you will pay an interest rate with loans, too, as discussed earlier when we compared the two forms of credit. It’s also true that not all loans are created equal, just like credit cards.
The main thing that makes credit cards a worse idea for those needing money quickly is a general set-up. You basically have an unlimited pool of payday loans. Each month, you have a large sum of money you can use, and you’ll sink deeper and deeper into that hole while your rates rack up.
Loans give you the whole amount up front, and you can know exactly what the APR is, how much you’ll be paying, and what the big picture is. Credit cards weren’t designed with a big picture in mind.