How Does Credit Cards Work?
All of us are obligated to make a minimum monthly payment of 1% to 3% of the balance when it comes to paying off our credit card debts. However, you’ll need to pay the full amount to avoid accumulating interest. Interest is calculated based on average daily balance during the month and not the ending balance. To put it simply, credit cards are simply a revolving debt as we are limited on how much debt that we can have on our credit cards; the amount of credit cards that we can have available from month to month depends on how much we spend and repay.
In general, credit cards are unsecured, which means that they are backed by collateral.
Because of higher interest rates, credit cards are usually used for short – term financing. Use only credit cards for only purchases that you’ll be able to pay by the due date, just like daily expenses or monthly bills. You could use cash or debit card for these same purchases.
How personal loans work?
Personal loans may either be secured or unsecured. As a result, they have a lower interest rates than credit cards, especially when you have a good credit. Personal loans are best used for longer term financing and this includes things like adopting a child, starting a small business or consolidating credit card debt.
Which one do we use for consolidating credit card debt?
Credit card can be used as several tools. If we can pay off our debt relatively quickly. We should also develop plan to pay off our entire credit card bill before our 0% term expires.
If you need help on staying on track to pay off our debts, a personal loan with fixed payments be of a better approach. A debt consolidation loan can also typically make sense if we get a lower interest rate on the loan we pay for our existing debt.
In short, credit cards and personal loans are treated differently on credit reports. Credit scoring formulas weigh in how much of your revolving credit is in use; credit utilization ratio over about 30% may reduce your credit scores. Moving over a credit card balance to installment loan may reduce your credit utilization ratio.