Credit cards are the most used payment tool in the USA, while in Italy debit cards are more popular and, even more, cash. What’s exactly the deal with credit cards? That’s simple: they allow you to spend money even if you don’t have them immediately available in your banking account. By the way, you are basically borrowing money from your bank or credit card company and are making a debt you are going to pay later. If you clear all your balance each month, you generally pay no interest on the money you have used, otherwise, if you carry a balance (something that generally leads to debts on debts, especially among people who don’t use their credit card responsibly), you are paying interests. Credit card is a safe and convenient payment tool, as it allows you to not take much cash with you (the same happens with debit cards), plus, in some cases, you are also benefitting from perks and rewards for every payment you make. In addition, credit cards can be considered a loan at all effects, as the ability to carry a balance and pay something in installments can be a good alternative to traditional loans (provided that you still make a responsible use of this kind of loan). With that in mind, are credit cards a deal, also when it comes to borrowing money, or is it an expensive way to do it?
Loans: Between Interest Rates & Fees
The singular aspect of traditional loans is that they are offered to you at a certain price: you are not only going to pay interests on the borrowed sum, but you are generally paying also extra fees that may include:
- preliminary investigation costs
- insurances against the risk of not being able to pay installments in case of a disease or loss of job
Of course, these costs make loans an expensive form of financing yourself, especially if you are asking them just for small amounts of money. What about credit cards?
Credit Cards: A Less Flexible Way To Borrow Money
When it comes to credit cards, we are surely saving something, as we don’t have to afford preliminary investigation costs (your bank is borrowing you money you have been previously approved for, your credit card plafond) or insurances. With this in mind, credit cards may be already a convenient way to financing yourself. Still, you need to check also other things:
- Is interest rate on your balance higher or lower than the same your bank charges you for a tradition loan?
- How much money do you need? For small amounts of money, credit cards may be even cheaper than a loan, for big sums, unless you have one of those outstanding credit cards with stellar plafonds (that also come with expensive annual fees), a loan may be even the only alternative available to you.
- How much are you paying for you credit card? Keep in consideration the annual fee, the benefit you are taking from eventual rewards (which should be higher than the annual fee and other associated costs in order to make credit card a convenient payment tool) and the real utility this payment tool has in your everyday life, other than the temporary need of a loan. Someone who has never had a credit card, does everything with their debit card and only needs a loan in a particular moment of their life, should surely go for the traditional one without thinking twice. Of course, credit cards may be the best choice in general and for small amounts of money, if you own one with no annual fees (in Italy, for example, there are some free credit cards with no annual fee, even if they don’t come with rewards).
Credit cards are generally a good deal if you use them responsibly, possibly by clearing your balance each month and by carrying one only when you have an urgent need, provided that your rewards are higher then your annual fee. Credit cards with no rewards and even no annual fee may be even a greater deal, plus, they don’t induce in overspending. Of course, when it comes to borrowing money, we should check the interest rates applied on both credit cards and traditional loans, plus the other fees we are going to pay and the real choice we have (for high amounts of money, a traditional loan may be the only valid solution) before making a final decision.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2022 Alessio Ganci