Today, we are going to highlight the characteristic features of credit cards vs payday loans. Let’s consider the main details about this two financial products and payment instrument.
Table of contents
- Credit Cards Guideline
- Payday Loans Guideline
- What are the pros of payday loans?
- Should I choose a credit card or a payday loan?
- What debt to pay first – credit card vs payday loan?
Credit Cards Guideline
A credit card is a banking product with which a man can make purchases, transfers and withdraw cash, even if he does not have his own money at the moment. Funds are borrowed from the bank, spent at regular retail outlets and online stores or cashed out. This means that a credit card gives financial freedom without the need to borrow from friends, that is, it is possible to always have funds for necessary or unforeseen expenses and not to postpone the desired purchases for a long time.
The credit card can be digital or plastic. A plastic card is of small size, on which there is:
- a unique number;
- the name of the holder;
- period of validity;
- emblems of the bank and the payment system within which the product operates;
- chip, magnetic stripe or contactless payment code;
- CVC or CVV code.
What can I use a credit card for?
- The basic rule is to get a credit card only when you have a steady stable income, and do not spend more than your regular income.
- When applying, study the loan agreement. If some of the info in it is unclear to you, ask the manager to clarify it.
- Use the card only for non-cash or online payments and try not to withdraw cash from it to avoid high fees and interest.
- Check the debt and grace period terms in the mobile app so as not to miss a payment.
- If you change your mind about using a credit card, do not forget to close it correctly. To do this, you need to pay the remaining debt and contact the bank branch with a request to terminate the loan agreement. If the card has a service charge, this amount will be debited regardless of whether you use it or not. The outstanding debt will lead to fines and penalties.
What makes credit cards useful?
It is possible to profitably use a credit card.
It is possible, if wisely — that is, carefully keeping certain rules and not going beyond those restrictions, on violations of which you lose a lot. In fact, the retail financial services market is quite competitive, and the benefits of this competition are quite justified. The large foreign retail banks and private banks that opposed them, fighting for the customer, really made the credit card service quite high-quality, technological and diverse even by world standards.
How can you apply for a credit card?
Many holders, inclusively of American Express, Bank of America, Capital One, Chase, Citibank and Discover will allow you to check if you’re pre-qualified or pre-approved for issuing credit cards.
The manager likely found your information in a credit reporting agency or did a soft assessment on your credit dossier. A loyal assesstment or inquiry, which is less likely to affect your credit score, provides a manager with the basic information but isn’t recorded as a hard inquiry, which can negatively affect your credit score.
Generally, every buture card holder may choose the following options:
- A low-interest card: This type of credit card has a lower-than-average APR and is best if you think you’ll have to monitor the available limit, as it will reduce the amount of interest you pay.
- A zero APR card.
- A bonus card with cash back or miles based on a limit of spending. The rates vary. Rewards cards typically require good to excellent credit.
What are the costs of a credit card?
To begin with, let’s look at the main advantages of a credit card. The advantages of this product include the following indicators:
- Grace period. This is the name of the period during which a credit card can be used without interest. If you repay the debt in full during this period, you will be able to use the card without overpayments. The grace period can last from 50-55 to 100-200 days;
- Revolving credit line. After paying off the debt, the card can be used again on the same terms. The credit limit is renewed continuously until the card is closed;
- Flexibility. A credit card can be issued for any purpose – for everyday use, payment for large purchases, for travel or in reserve. There are many different offers on the financial market – it is easy to choose the right credit card for your individual purpose;
- Bonuses for purchases. Banks are introducing a variety of bonus programs for credit cards – cashback, miles, discounts and others. This is how they stimulate non-cash purchases with the help of cards.
What are the risks of a credit card?
At the same time, the credit card has several drawbacks that need to be taken into account:
- High interest rates. They may be two or three times higher than that of a personal loan issued on similar terms. The rate depends very much on the solvency and reliability of the borrower;
- Restrictions on some operations. A credit card usually does not allow you to withdraw cash and transfer money. For these operations, the bank charges a high commission, and sometimes stops the grace period and increases interest;
- The risk of fraud. The security of the credit card must be monitored very carefully. If a credit card or its details fall into the hands of a fraudster, then you risk getting a large debt to the bank;
- Psychological aspect. Proper use of a credit card will require a certain level of financial literacy and the ability to plan your expenses. If you spend more than you earn, use the card incorrectly and make payments on time, you can fall into a very large debt.
Payday Loans Guideline
The definition of payday loans says that these are funds issued to the borrower for a certain but short term at a fixed rate. You can get them through a payday lending service, but you need to understand how these companies work in order to distinguish a bank loan from a payday loan.
Payday direct lenders issue extra cash if they meet the following requirements:
US citizenship;
age limit: equal to 18 or over;
the presence of permanent registration on the territory of the United States.
What can I use a payday loan for?
#1. Take care of yourself
Spending money on personal health is one of the most useful investments. A timely diagnosed disease can be treated much easier, faster and cheaper.
#2. Self-development
The trends are such that the knowledge and skills acquired during the student years quickly become obsolete and they are not enough to get a high-paying position and career growth. It is necessary to constantly improve yourself professionally. To do this, reading specialized books, participating in forums, attending advanced training courses will help. Not all companies are ready to invest in the human capital of their staff, so you will have to take care of it yourself. Do not save money – if you decide to take a payday loan, then invest money in your skills.
#3. Travel
The impressions of travel will remain in the memory for many years. Remembering foreign countries and wonderful cities, you will be able to keep your spirits up and optimism for the whole next year. Do you want to visit the Eiffel Tower, the hills of Montmartre? Or can he touch the Colosseum? Swim in the waters of the Atlantic or the Mediterranean Sea? Not having enough funds, you can take out cash advance.
#4. Rest
It is known that you need not only to work, but also to have rest. You can gain strength not only somewhere far from home – if your income does not allow you to enjoy a full rest, take a few days off at work and organize an overload for yourself. Going to the cinema, swimming pool, ice skating. Breakfast in a cafe, lunch in a restaurant, and then a visit to the ballet, exhibition with payday loans.
#5 House renovation
#6. Smart electronics
Modern gadgets greatly simplify our lives. Do not waste time but buy them right now.
#7. Hobbies
Practicing your favorite hobby helps to relax physically and psychologically, helps to restore strength. Do not skimp on what can give you pleasure – books, film premieres, musical compositions. If you are interested in photography, spend money on buying a good camera.
Why are payday loans useful?
Currently, payday loans are an effective financial tool that allows you to fill the gap in the family budget. It will take a minimum of time and effort to take out online loans, and the decision to approve the application is made within 15 minutes. Thus, you can get money for treatment, training and other needs, covering unplanned expenses.
In the process of issuing an online payday loan without guarantors, the following nuances should be taken into account:
- You should apply for an online short-term loan only when you are sure that you will be able to repay it.
- Financial market experts recommend taking out a cash loan for the shortest possible time. In this case, the overpayment amount will be several times less.
- No matter how difficult your financial situation is, you need to repay the payday loan by the end of its validity period. Otherwise, a short-term solution to financial problems can turn into much more serious consequences.
- You should not take out a quick loan to buy optional things. For example, a new smartphone model. This is simply unprofitable. It is advisable to issue instant loans without refusal to the card if something extraordinary happened: someone got sick, had an accident, there was a fire or you just need to live up to the next paycheck. Many people apply for a small loan to repay a bank loan. On the one hand, contacting the online direct lender will solve your problem, and on the other hand, such an undertaking should be treated very carefully. If you are not sure that you can pay it back, it is better not to do this. Otherwise, you will receive not only a fine for delinquency, but also get into a deep debt trap.
- Take out an online loan only in critical situations, if there is no other way out. The loyal requirements of microfinance organizations to potential borrowers contribute to an increase in demand for this type of services in the financial market. Unlike banks, online lenders are not interested in the client’s credit history, the level of his income, the presence of judicial restrictions, etc. They are ready not to pay much attention to this fact. In fact, the procedure for verifying the borrower’s data is formal. At the same time, the required amount is transferred to the specified account almost instantly. For comparison, the procedure for issuing a personal loan in a bank takes an average of 3-5 days. In some cases, it may be delayed indefinitely, and it may not be decided in favor of the applicant.
How to apply for a payday loan?
How to send a request for a payday loan to several organizations at once – just in 3 steps:
- Step 1. Fill out the form;
- Step 2. Wait for an individual offer;
- Step 3. Get deposited.
Takeaways:
- The most trouble–free online loans to the card, e-wallet, cash and other ways are loans with a bad credit history and delinquencies.
- Low interest rates – online lenders and banks know that the application is sent to several organizations at once, so everyone is ready to offer more favorable conditions – from 0% to 1% per day, depending on the type of loan and your credit history.
- The opportunity to get the best loan online.
- Issuing a loan takes only 10-15 minutes.
- Simple repayment methods: by card, online wallet, cash, SMS and others. Loans are available throughout the USA around the clock.
What are the costs of payday loans?
The amount of the fee might vary from $10 to $30 for every $100 borrowed, depending on your state requlations and the maximum amount your state permits you to borrow. A fee of $15 per $100 is common. This equates to an APR of almost 400% for a 2-week loan. So, for example, if you need to borrow $300 before your next payday, it would cost you $345 to pay it back, assuming a fee of $15 per $100.
What are the pros of payday loans?
There are several advantages of payday loans at once. The first is the speed of loan issuance. For example, your application will be reviewed as quickly as possible, from several minutes to an hour. The money can be received on the day of the appeal. At the same time, you will not have to wait for verification of documents, approval of the amount and interest for several days.
An important advantage is the convenience of issuing a loan. Now most microfinance organizations provide the opportunity to apply for a loan by phone or online. All that remains is to come to the office for the money. And some direct lenders can even deposit money directly to the card.
When getting a loan from banks, many face a problem: people working informally are usually denied a loan. But online payday lending services do not require official confirmation of income, certificates, etc. Often, it is enough for the borrower to say that he has a job and a steady income, the level of which he is ready to indicate.
Pensioners can also take out a small payday loan, because the age limit is 65 years old. Young people have the right to issue a loan online when reaching the age of 18.
If you take out a short-term loan for the first time, then in addition to your ID, you may be asked for a second document, when you re-apply, you only need an ID. The only term is that a permanent residence permit is required in the region of the MFO’s presence.
A significant advantage of such a lending option is that a loan can be issued by a person with an imperfect credit history (bad credit loan), or with a zero one. Some people even use payday loans as a way to improve their credit history in order to easily get a loan from a bank in the future.
What are the risks of payday loans?
The main risk of using quick loans is the possibility of getting into debt bondage if you do not return the money on time. Since interest rates on lending through payday lenders are regulated only by the market, there are offers of up to 1%-2% per day.
It is not recommended to get a loan from an online lender to make a payment on a bank loan. After all, next month you will have to pay for two obligations. Faced with financial problems and the inability to make a loan payment, it is better to contact the bank immediately. Tools such as credit holidays or restructuring will help to avoid delays.
Another negative aspect awaits the regular customers of the MFIs. The fact is that for banks, such borrowers are at risk. Regular microcredit indicates unstable earnings or low financial literacy. Therefore, banks do not issue loans to such clients, or only at an increased rate to compensate for the risks. Difficulties may also arise if an MFI borrower has applied for debt refinance. Usually banks refuse customers in such a situation.
A separate aspect is the correction of the negative credit history at the expense of payday loans. MFIs rely on this effect in advertising offers. And indeed, the borrower who returned the loan on time increases his credit score. But you need to use this tool very carefully. Otherwise, there is a risk of worsening the situation.
Should I choose a credit card or a payday loan?
| Credit Cards | Payday Loans |
| How you use them: Buy now; pay later | How you use them: Buy now; pay later |
| How they work: Receive a revolving credit limit | How they work: Receive a one-time payment of cash |
| APR: Interest rate can vary or remain fixed; current average is 16.28% | APR: Interest rate can vary or remain fixed; current average is 1-2% daily |
| Monthly payments: Variable monthly payments; depending on how much you spend in a billing cycle | Monthly payments: Fixed or variable monthly payments; depending on the type of loan |
| Credit building: Can help you build credit | Credit building: Can help you build credit |
What debt to pay first – credit card vs payday loan?
Lenders propose payday loans as a short-term fix for consumers when you are in the red. There’s no credit check required, and you can usually be approved for a payday loan quickly. But this easy-to-get money comes with a heavy price, usually in the form of high fees and huge interest rates.
Always prioritize getting rid of payday loans. Here’s why:
- It’s best to pay back your highest interest rate obligations first. Even if you think you have a high rate on your credit card, payday loans are still necessary to cover first. The APR on a payday loan can range 390% – 600%.
- Payday loans can lead to a debt trap. If you can’t pay in full on the first payday, a new finance charge is added and the cycle repeats. Within a few months, you could end up owing more in interest than the original loan amount.
- Unlike credit card companies, most payday loan lenders won’t let you refinance your obligations.
