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Credit Cards vs Personal Loans vs Payday Loans

Credit Cards vs Personal Loans vs Payday Loans

Three of the most popular methods for borrowing a bit of extra cash are credit cards, personal loans and payday loans. Each of these loan types have their share of benefits and drawbacks, making them better suited to different financial circumstances.

Before you sign on any dotted lines, it’s worth getting an idea of what benefits each type of loan can offer, and finding out if there are any pitfalls worth keeping an eye out for:

Credit Cards

  • Useful for small or large borrowing
  • Flexible repayments
  • Option to earn benefits and rewards
  • Interest and fees can build up
  • Less ideal for very large expenses
  • Temptation to borrow more

Young woman on the beach phoning the bank for credit card support

What makes credit cards useful?

A credit card effectively functions as a flexible loan, allowing you to borrow money from a lender up to a predetermined limit. If you keep up to date with your repayments, you’ll always have the option to flash your fantastic piece of plastic to make payments in shops, over the phone, or online, even for international purchases and services.

It’s also possible to use a credit card to get cash advances from the bank, a bit like withdrawing money from your bank account via an ATM, though there are often extra costs involved.

Depending on your credit card provider, you may also be eligible to earn additional rewards and benefits by using your credit card, such as free travel insurance, or bonus points that can be redeemed at selected retailers.

How can you apply for a credit card?

Many lenders offer credit cards, ranging from major banks to independent credit providers. To apply, you’ll need some identification and evidence of income, to prove that you’ll be able to pay back any money you borrow from the lender. Your lender will also check our credit history, to determine the level of risk involved in lending to you.

What are the costs of a credit card?

Many lenders charge annual fees on their credit cards, as well as interest. Interest rates for credit cards tend to be on the high side, though depending on how you use your card, you may not always be charged for interest. 

Many credit cards come with a monthly interest-free period on purchases. If you make a purchase on your credit card as long as you repay this amount before the month’s interest-free period ends, you won’t be charged interest on the purchase. But if an amount is left outstanding, interest will be charged on this remainder, and you’ll lose the interest-free benefit for the next month until the card is full paid off.


Vlad has a credit card with a 45 day interest free period and a monthly billing cycle. He uses it to buy a new smartphone on the 1st of January. He has until the 14th of February (45 days from 1 Jan) to pay back the lender for his phone, or he’ll be charged interest on what he owes for January and lose the interest-free period for February.

Towards the end of January, Vlad want to replace his washing machine. He could use his credit card to buy a new one on the 31st of January, the last day of his billing cycle. However, because the interest-free period is calculated from the START of the billing cycle (e.g. 45 days from 1 Jan), he’ll need to pay back the value of his new washer to his lender by 14 Feb, just like his new smartphone, if he wants to avoid being charged interest on both his January and February purchases.

Vlad delays his washing machine purchase until 1 Feb, giving him until 17 March (45 days from the start of the new credit card billing cycle) to make his repayments and avoid interest charges.

What are the risks of a credit card?

Unlike many other types of loan, where you borrow a set amount of money then make steady progress towards getting this amount paid back plus interest by a certain date, credit cards tend to be a lot more flexible, which can be a problem as well as a benefit.

While you’re encouraged to fully repay your credit card each month, many lenders typically only require that you make a minimum repayment for a small percentage (often just 2%) of the outstanding balance you owe, plus interest charges. If you only make these minimum repayments, you’ll VERY slowly make progress towards clearing your debt, but you’ll likely end up paying a LOT of extra interest charges to your lender.

Also, because a credit card effectively functions as an open-ended loan, even if you’re already struggling to manage your repayments, you may still be tempted to borrow even more money. This could lead to you losing  and previous progress made towards repaying your loan, and getting you closer to being trapped in a cycle of inescapable debt.

Personal Loans

  • Good for making large purchases
  • Can consolidate other debt
  • Fixed borrowing keeps repayments manageable
  • Less flexible, fewer options
  • Risk of losing security
  • Extra fees could apply


What makes personal loans useful?

Personal loans are structured differently to credit cards or lines of credit. Rather than offering the flexibility to borrow any amount of money up to a fixed limit, and to then repay what you borrow as you go, personal loans involve borrowing a fixed sum of money that you receive from the lender up front, then making regular repayments over a set term to make sure that this amount ens up fully paid back to your lender, plus interest, on time.

This makes personal loans more useful for making large single purchases, such as buying a car, starting up a business, or paying for a dream wedding. They can also be used to consolidate multiple smaller debts (e.g. credit cards, payday loans) into a single, easy to manage loan, so you’ll only need to make the one repayment per month, and only be charged interest the once per month.

Because you can’t typically borrow more money and increase your level of debt with a personal loan, you should be able to make steady progress towards paying back what you owe, with less risk of ending up trapped in a bad financial position.

How to apply for a personal loan

Personal loans are available from a selection of banks and non-bank lenders, including some lenders that specialise in providing personal loans for borrowers with special needs, such as nonconforming personal loans for borrowers with bad credit.

Much like applying for a credit card, when you apply for a personal loan you’ll need to provide your personal details, plus evidence that you’ll be able to manage your loan repayments. Your lender will also check your credit history to determine the risk of lending to you.

Depending on the type of personal loan you apply for, you may also need to provide security to guarantee the sum you’re borrowing. For example, many car loans are guaranteed by the value of the car you’re buying, so if you don’t make your repayments, your vehicle will be repossessed and sold by the lender to cover its losses.

What are the costs of a personal loan?

Personal loans typically involve paying interest on the money you borrow, either at a fixed or variable rate. Fixed rates guarantee consistent repayments for the full term of the loan, for simpler budgeting, while variable rate loans usually offer greater flexibility, and may let you enjoy reduced repayments if your lender cuts its rates.  You may also need to pay establishment and/or ongoing fees on your personal loan.

The length of your personal loan term will make an impact on how much it will ultimately cost you in terms of interest and possibly fees. The shorter your loan term, the more expensive your monthly repayments will be, though you’ll pay less in interest and ultimately pay off your loan sooner. A longer loan term can make your monthly repayments more affordable, though the total interest and fees you’ll have paid by the end of your loan may be significantly higher. Some personal loans (often those with variable interest rates) include flexible features such as offset accounts and redraw facilities that provide extra options for managing your loan repayments, which may help you to reduce some of your interest costs in the right circumstances.

What are the risks of a personal loan?

Because personal loans need to be organised in advance, it’s usually straightforward for borrowers to work out whether they can afford the repayments before they sign on the dotted line. 

If your personal loan has a variable interest rate, there is a risk that the rate could rise, making your loan repayments more expensive. In such a case, you may need to consider the options for refinancing your personal loan, whether with your current lender or a different one.

The greatest risk to keep in mind when you take out a personal loan is being stung with surprise fees, which (depending on your lender) may be charged if you choose to exercise some of your loan’s optional features. You may also be charged penalty fees if you make extra repayments or complete your loan early, to make up for the interest charges the lender will miss out on.

Also, if you opt for a secured personal loan and don’t keep up with your repayments, you may risk losing your security asset, whether that’s your car, your property, or even just a bank deposit.

Payday Loans

  • Fast cash in a pinch
  • Handy for small purchases
  • Simple to apply for
  • Interest + fees add up quickly
  • Temptation to borrow more
  • Tough penalties for defaults


Why are payday loans useful?

The typical example scenario for a payday loan goes something like this:


Janice’s family fridge has broken down, right in the middle of a summer heatwave. She needs a new replacement right now, but all the money from her last payday has already been accounted for, covering bills and life’s other expenses. She’d easily be able to afford a replacement in a month’s time, but that’s not going to save the rapidly-defrosting food she needs to feed her family right now!

By approaching a payday lender, Janice can get a small loan approved in a matter of minutes, allowing her to pick up a new fridge that very day and rescue her melting ice cream. When Janice’s next payday arrives, she can pay back the loan, plus any fees and charges, and get on with her life.

How to apply for a payday loan:

Most payday lenders can be quickly contacted by phone or online to make an application. This application is usually faster and less involved than the process of applying for a credit card or a personal loan, though you’ll still need to provide your personal details and some evidence of income to show that you’ll be able to afford to pay the lender back. 

Your payday lender will then confirm your details and perform a credit check. Payday lenders tend to be more flexible around bad credit than many larger lending organisations, but if your credit history clearly shows major financial problems, your application may be declined. 

Once your payday loan application has been approved, you’ll often be able to receive your funds very quickly, sometimes literally within a matter of minutes. 

What are the costs of payday loans?

Unlike credit cards and personal loans, payday loans don’t charge interest on the amount you borrow – only fees. However, these fees are usually listed in percentages, based on the amount you owe, similar to interest rates. 

Current Australian government legislation requires that establishment fees charged at the start of a payday loan can only total up to 20% of the loan principal (e.g. for a $600 loan, there can be a maximum establishment fee of $120). On top of this, the monthly ongoing fees can only total a maximum of 4% (e.g. for a $600 loan, the ongoing fee can be a maximum of $24 per month). Payday loans tend to have fairly short terms, often ranging from as little as 2 weeks to as much as 12 months.

What are the risks of payday loans?

Payday loans provide fast and simple access to money, which can prove very tempting to people who are already experiencing financial stress, and are thus the most vulnerable to extra costs, fees and charges. Even if you only borrow a small amount of money from a payday lender, if your finances are already tight, there’s a big risk of ending up in more debt that you can realistically handle if you’re not careful, or if you experience some bad luck (e.g. having to pay for car repairs after you’ve already taken out a loan for your new fridge). It just takes one missed repayment to find yourself slapped with steep penalty fees, which can quickly add up, leaving you in real financial trouble.

The best precaution when thinking about payday loans is to take some extra time to look carefully at all the terms and conditions involved, work out a budget to see if you’ll be able to realistically afford the extra fees and charges, and decide whether you think these extra costs will be worth it. Taking this extra time to consider your options may mean you won’t get your hands on that money quite as fast as simply applying for a payday loan, but avoiding the extra risk of ending up with problem debt is often worth it. 

Also, try to avoid using payday loans as a “stopgap” solution for managing repayments on larger debts, such as overdue credit cards or personal loans. Borrowing more money could allow you to avoid a late repayment now, but won’t fix the root problem, and could leave you in even more debt trouble further down the line.

If you ever find yourself struggling with any loan repayments, contact your lender to find out your available options. Alternatively, contact MoneySmart for free financial counselling, or call Australia’s National Debt Helpline on 1800 007 007.

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Learn more about credit cards

How to increase my Commonwealth credit card limit?

Commonwealth Bank credit cards are extremely popular in Australia for everyday purchases and big ticket items alikers. A number of the card’s functions can be customised, depending on your needs and desires. If you wish to increase your Commonwealth credit card limit using the CommBank, you can usually do so on the app or via NetBank.

In the CommBank app, tap on the ‘Cards’ icon and choose your credit card. Then, click on ‘Credit Limit’ and select the ‘Increasing your limit’ option. If you don’t have the CommBank app, you can also increase your Commonwealth Bank credit card limit through NetBank. Simply log on and go to Settings, then click on ‘Product Requests’ and then choose ‘Credit Card Limit Changes’. 

Once the bank has received your application, they will review your account and payment history. Based on this assessment, your application will either be approved or denied. If approved, your new limit will be applied to your card instantly. 

While increasing your credit card limit may be an easy process, it’s important to remember that you should only request limits that you can manage. A high limit increases the risk of having a larger debt, even with cards that provide low-interest rate options. So, it’s important to think carefully and seek advice from people you trust before increasing your Commonwealth Bank credit card limit.

Can I transfer money from my American Express credit card to my bank account?

If you’re an American Express credit card customer, you may not be able to transfer money from your credit card to your bank account. However, you may be eligible for cash advances, which involves withdrawing money through an ATM. 

To qualify for a cash advance, you’ll likely have to enrol for American Express Membership Rewards. Consider checking your online credit card account to see if you can withdraw a cash advance and, if so, the fees and charges you’ll incur for this transaction. 

You should remember that cash advances are different from balance transfers, which were available with some American Express credit cards earlier. Balance transfers allow customers to consolidate debt from high-interest credit cards to a credit card offering a lower interest rate. If you only recently applied for an American Express credit card, balance transfers may not be available irrespective of the card you own. 

Does Woolworths Qantas offer any credit card insurance?

Credit cards can be useful for managing your expenses, but they also come with other advantages like credit card insurance. Your Woolworths Qantas Platinum Credit Card may offer a host of complimentary insurance options, which include: 

  • Travel insurance: Cover for your whole family when they travel with you, with unlimited overseas medical emergency cover and $500,000 accident insurance for accidental loss of life.  
  • Purchase security insurance: If you purchase an eligible product with your Woolworths Qantas Platinum Credit Card, the cost of theft or damage that occurred within 90 days of the purchase will be covered, provided the amount doesn’t exceed the purchase price of the item or up to $2500 per event. 
  • Extended warranty insurance: If you purchase eligible goods with your Woolworths Qantas Platinum Credit Card, this complimentary insurance will extend the manufacturer’s Australian warranty by up to 12 months. 
  • Global hire car excess waiver: If you’re legally liable to pay an excess or deductible in the event of loss or damage to a rental vehicle that was booked using your Woolworths Qantas Platinum Credit Card, the costs will be covered. 

To find out more about Woolworths Qantas credit card insurance, you can call them on 1300 10 1234. 

What types of NAB credit card insurance are available?

If you hold a NAB Premium, Platinum or Signature credit card or a NAB Platinum Visa Debit card, you could be eligible for the bank’s free travel insurance. You may be covered for overseas travel and interstate flight changes, along with transport accidents, domestic hotel burglary, purchase protection, extended warranty and price protection. 

It’s important to note that the NAB credit card insurance only kicks in after you’ve made an eligible purchase, so you won’t get the credit card insurance benefits if you haven’t used the card.

To make a NAB credit card insurance claim, you can send an email to cardclaims@allianz-assistance.com.au. You can check the eligibility of your claim or make a claim online as well.

If you have a travel incident and need to speak to someone regarding your NAB credit card insurance, contact 24x7 Emergency Assistance on +61 7 3305 7499 (reverse charges may apply). You can also send an email to medical@allianz-assistance.com.au.


How can I increase my credit card limit on my American Express card?

If you want to increase the credit limit on your American Express (AMEX) credit card, you will need to apply through the AMEX Online Services, or by calling the number on the back of your card. You may need to share personal information that the bank can use to assess whether the requested limit is suitable for you and your current financial status. Once your application is approved, your new limit will be ready for use within an hour.

Why do different credit reporting bureaus use different scores?

The reason Equifax, Experian and Illion use different scores is because they are independent companies with their own different methodologies. As a result, a score of, say, 700 would mean different things at different credit reporting bureaus.

However, the one thing they have in common is that they divide their scores into five tiers. So if you receive a tier-two credit score from one bureau, you will probably receive a tier-two score from the others, as well.

Can I get a credit card on part-time/casual work?

Yes, as credit card providers look at your annual income amount as well as your occupation. Minimum income requirements tend to be between $30,000 – $40,000 for standard and rewards credit cards, however low income credit cards can have minimum income requirements as low as $15,000 per year.

What happens if I have a bad credit score?

If you have a bad credit score, you might encounter two main problems. First, the lower your credit score, the more likely you are to be rejected when you apply for a loan or any other credit product. Second, if your application is accepted, the less likely you are to qualify for the lowest interest rates.

Why should I check my credit rating?

There are two reasons you should check your credit rating: so you have a better understanding of your financial position, and so you can take action (if necessary) to improve your credit rating.

Lenders use credit ratings or credit scores to assess loan applications. The higher your score, the more likely you are to get approved, and the more likely you are to be charged lower interest rates and lower fees. Conversely, the lower your credit score, the less likely you are to get approved, and the more likely you are to be charged higher interest rates and higher fees.

What type of complimentary travel insurance is available with Citibank credit cards?

The Citi Prestige, Premier, Rewards, Emirates Citi World MasterCard, and Gold cards provide complimentary travel insurance to customers. These Citibank credit card insurance benefits are managed and issued by Allianz Global Assistance (AGA).

Depending on the type of card, the Citibank credit card insurance coverage may include:

  • Foreign travel insurance
  • A comprehensive insurance policy for foreign travel for up to six months
  • Transit accident insurance
  • Accidental injury or demise while travelling on aeroplanes, buses, trains, or ferries in foreign locations
  • Interstate flight inconvenience insurance
  • Cover for unexpected cancellations, damaged or lost baggage, flight delays, or rental vehicle excess expenses for up to 14 days while travelling within Australia.

To be eligible for the complimentary Citi credit card insurance, you must book tickets using your card or through the Citi Travel Program.

Can I use PayPal to transfer from a credit card to a bank account?

You can easily link your credit card to your PayPal account. When you need to make a payment, PayPal makes an instant transfer from your bank account, provided you’ve linked and confirmed your credit card details.For credit card holders, you can transfer funds from eligible cards listed in the “Instant” section of the money transfer page.

Here is how you can transfer money from PayPal to your bank account:

  1. On the “My Wallet” tab, select “Transfer Money” and then click on the “Transfer to your bank account” option.
  2. Choose the bank account where you want to transfer the money and click “Continue.”
  3. Enter the amount, review and click “Transfer Now.”
  4. When you confirm the transfer, the amount should be moved to the bank account linked from the chosen credit card.

How do I transfer money from my Commonwealth bank credit card to my bank account?

Your Commonwealth bank credit card may include a cash advance benefit, but you won't be able to transfer money to your bank account. 

You can, however, withdraw cash from your credit card at an ATM. You should remember that you have to pay a fee for such transactions, and you’ll be charged interest from the day you withdraw the cash. 

Unlike other credit card transactions, you don’t get an interest-free repayment period for cash advances. Also, you may not be able to access your full credit card limit for a cash advance.

How do I file a Virgin Money credit card insurance claim?

To make a claim, you can either call Allianz Global Assist at 1800 072 791 or visit their claims page. If you’re making a claim related to any travel-related complimentary insurance, such as international travel or transit accident insurance, you may need to visit their travel claims website. Again, for filing a claim while travelling overseas, you can call Allianz at +61 7 3305 7499.

Before filing your claim, consider checking which complimentary insurances are available with your Virgin Money credit card. Customers who own a ‘no annual fee’ or ‘low rate’ credit card don’t get these benefits, while some other credit cards only come with guaranteed pricing and transit accident insurance.

Remember that you’ll need to submit proof that your credit card offers the complimentary insurance benefit which you are claiming. You can read the credit card complimentary insurance terms and conditions for details regarding the benefits available on your credit card.

Do I qualify for Bank of Melbourne credit card insurance?

You may be eligible for transit accident insurance, purchase security insurance, and extended warranty no matter which type of Bank of Melbourne credit card you own. 

Some credit card customers may get coverage for international or domestic travel insurance, rental vehicle excess in Australia, and price guarantee as well. 

However, the exact terms of the insurance coverage can differ based on the specific credit card. For instance, if you buy any personal items with a Level 1 credit card, your purchase security insurance may be valid for up to four months from the purchase date. For someone with a Level 2 credit card, such coverage may only be available for three months.