In the credit card versus personal loan debate, it’s important to weigh up costs and benefits.
Used wisely, credit cards do have some advantages. They offer an interest-free period (usually around 55 days); can provide a financial lifeline in emergencies; and cards make it possible to grab ‘on the spot’ bargains.
Nonetheless, RateCity chief executive Alex Parsons cautions, “The key to making the most of credit cards lies in setting, and sticking to, personal spending limits and paying off the card in full each month to avoid interest charges. If you’re unlikely to manage this, a personal loan might be a better option particularly for big ticket buys.”
Like cards, personal loans have definite upsides. The time and paperwork involved in applying for a loan makes impulse buys less likely, and while you won’t get the benefit of interest-free days, the rates can be lower than for credit cards.
As a guide, the RateCity database shows card rates range from under 12 percent through to 20.99 percent at the upper end of the scale. Personal loan rates are available below 9 percent. The combination of a cheaper rate, fixed repayments and a set term can make personal loans a better value option for high value purchases.
Cards streak ahead
Despite the pluses of loans, credit cards take pole position for popularity.
John Arnott, executive director at ING DIRECT said, “Our latest Household Financial Wellbeing Index shows that only one in five households have a personal loan at present, down from 20 percent in early 2010. By contrast only 15 percent of households don’t have a credit card – so cards certainly have the weight of numbers.”
The intriguing aspect is that Australians appear to be weaning themselves off both types of debt.
Arnott added, “Our research found 17 percent of households say their favourite way to spend money is paying off debt.”
The Reserve Bank of Australia (RBA) confirmed this trend in its March 2013 Financial Stability Review, saying, “Many households have been taking advantage of the lower interest-rate environment to repay existing debt more quickly than required”.
Our preference for paying down debt has had a significant impact on national card debt, which has fallen from $50.6 billion in June 2012 to $49.8 billion in mid-2013. Most importantly, card debt attracting interest charges has also dropped, dipping from $36.6 billion 12 months ago to $34.9 billion in mid-2013.
The bottom line is that both personal loans and credit cards have their place in a financial toolkit. Alex Parsons sums it up, “The important thing is to assess the product best suited to your needs, and seek out a low rate and good value with the help of comparison websites such as Ratecity.com.au.”