The Ups and Downs of Credit Card Loans

Author Nickels
Read time 5 minutes read time

Have you ever needed more money than what’s in your account? Yes? If you relied on your credit card to get you through, you may have racked up a little bit of debt. Taking out a personal loan to pay off a credit card is an option many borrowers consider. The right loan could offer a lower interest rate, a set monthly repayment amount, and it could save money on interest.

But have you ever considered taking a loan on a credit card? A credit card loan should not be confused with a credit card cash advance, which often comes with astronomic interest rates and fees. Cash advances also typically bypass the credit card grace period and begin accruing interest immediately. For those reasons, a cash advance should be a consumer’s break-glass-in-case-of-emergency option.

When should you consider a credit card loan and how is it different from a personal loan? For some, the biggest appeal of a credit card loan is the convenience. Credit card loans are faster to process than personal loans and have less fees and lower interest rates than a cash advance. Sounds like the perfect combo, right? But, before deciding if a credit card loan is a good fit, do your research. That convenience might be outweighed by the cost to your credit score and your wallet.

The low down on credit card loans

A credit card loan doesn’t require an application and is based on the available balance on your credit card, therefore, it’s a tempting option when you need a quick cash infusion. But be sure to read the fine print.

  • First, not all credit card company’s offer loan options. So, check with your credit card company to see if they offer credit card loans and carefully review their terms.
  • Most credit card loans have a $500 minimum. So, if you need a loan of $200 to cover a smaller unexpected bill or home repair, you’ll have to request a loan for the minimum amount. More cash may seem nice, but not necessarily in this case. Unless you reinvest the extra dollars to bring your loan balance down, you’ll be paying interest on money you didn’t need.
  • A credit card loan isn’t separate from your credit card. Your borrowing power is tied to your cards available balance. A credit card loan won’t help improve your credit score and could actually bring your score down. Borrowing against your credit card balance will increase your card utilization ratio. And if the money you borrow puts your usage over 30%, it will negatively impact your score.
  • Since there are no applications or credit inquiries, a credit card loan does not count towards your number of hard inquiries – which means no negative impacts to your credit score. Also, your loan’s monthly repayments are rolled into your card’s minimum monthly payment, so you won’t have to make two separate payments.

Keep your options open

If you’ve ruled out a credit card loan, you’ve still got options. A credit card loan isn’t suited for paying off large debts or for making large purchases, since your balance is tied to your available credit card balance. If you’re looking for a better fit for your smaller loan needs here are a few possibilities to consider:

  • Apply for a credit card with a 0% introductory APR. Keep in mind that a credit card may not be suitable for every scenario. If you’re looking to pay for minor car repairs, this could be the way to go. But larger expenses or ones that require cash-in-hand warrant another option. Also, qualifying for a 0% offer usually requires a better than average credit score.
  • Consider a small personal loan. With a personal loan you set the amount of money you borrow, and typically the interest rates are lower. And unlike a credit card loan, a personal loan can diversify your credit history and give your score a lift in the right direction. If you decide to go this route be sure to carefully review the terms of the loan and weigh the impacts of any fees and interest rates. While personal loans typically offer the best interest rates, if your credit score isn’t in good standing the interest could end up being higher than a credit card loan.
  • Another, possibly less conventional option, is to budget and save. No amount is too little and it’s never too late to start. Saving money today, will offset future unplanned for expenses and give you a better sense of stability. Emergencies happen and are stressful enough without having to worry about financial impacts.

Unexpected expense can be intimidating, and with so many borrowing options it can be overwhelming to figure out what’s best for you. Research your options and create a plan that won’t stack more interest and debt on to your finances.