Credit Cards vs Payday Loans

One of the reasons there is such a wide variety of credit facilities is because there are so many reasons you might need to borrow, and one single form of borrowing often wouldn’t meet every need. Plus, as everyone has very individual and specific financial circumstances and commitments, it would be difficult to shoehorn people into using a type of credit that doesn’t suit them. Credit cards and payday loans are common ways to borrow, but are often used for different purposes.

Credit Cards

Credit cards are revolving credit facilities which enable you to borrow money up to your credit limit through a payment card. Credit cards carry extra consumer protections compared to standard debit cards, and you can also get balance transfer cards to transfer your credit card debt from one card to another to take advantage of lower interest rates. Credit cards require a minimum payment each month which usually includes any interest, chargeable transaction fees and part of the amount you have borrowed.

Payday Loans

Payday loans have set loan terms which you choose at the start of your application. The funds are transferred into your bank account and the repayments are due on pre-agreed dates. Payday loans are a form of high cost credit and they typically have higher acceptance rates for people with bad credit compared to mainstream loans and credit products.

What can I use a credit card for?

Mainstream credit cards have relatively low interest rates so they’re a good way to manage cashflow throughout the month. People with a 0% credit card may often use it to cover large payments to ease general money management. For example, if you buy an annual train ticket for £3000, you may use a 0% credit card and then make regular monthly payments over the next few months to repay the balance. Credit cards have varied uses and it depends on your money management ability as well as your financial circumstances when considering what you should use a credit card for. Commonly, credit cards are also used to purchase holidays, although this is usually because of the additional consumer protections in place rather than to make the purchase more affordable. If you are having to borrow for leisure purposes, you may need to review your budget and make some changes to accommodate your lifestyle.

What can I use a payday loan for?

Payday loans tend to be used for more emergency or unexpected payments that can’t wait until you next get paid. This is because they have a high interest rate. Payday loans shouldn’t be used for things like holidays as this is something you could plan and save for in advance to avoid paying unnecessary interest charges. There are ways to use payday loans wisely and a major step is considering your current and future financial commitments before applying.

Should I choose a credit card or a payday loan?

Choosing between a credit card and a payday loan depends almost entirely on your circumstances. Where possible, you should aim to choose the credit facility with the lower interest rate, however a smaller APR doesn’t necessarily mean it’s a more responsible option. For example, if you need to borrow £200 as a one-off, you could apply for a credit card or a payday loan. However, your credit card limit could be £5,000 which might tempt you to spend more than you need to and land you with a considerable debt. If you only needed £200 for an emergency payment, then £5,000 would be an unnecessary amount to have access to. If you find you need to borrow a few times throughout the month or year to manage your cashflow, then a credit card might be more sensible than a payday loan as long as you are a responsible borrower. In either case, you should always compare payday loans or credit cards prior to applying for one to ensure you’re getting the best deal.

Unless you speak to a qualified financial advisor, it’s difficult for someone else to determine which type of credit you should choose. We can only encourage you to research before applying for any credit and consider the pros and cons rather than just how much you can borrow.

To manage cashflow shortfall best, you should try to save money instead of borrowing. When you can, putting even just £20 into savings each month can help you cover the costs of unexpected payments or increased priority bills from time to time.