As with any showdown, you must know the facts about each contestant, along with the situation in which they are battling. In this case, we are comparing two forms of borrowing money, and the variables surrounding the debate will decide the victor. Payday loans may seem like a convenient way to get money fast, but the underlying costs and the damage they can do to your credit report can leave you worse off than you began. Credit cards are the more common form of borrowing money, but they are also the most common way to create a financial disaster. This is a heated debate for the victor is the one least detrimental to your personal finances, and payday loans and credit cards each have their ups and downs.
Payday loans are a fast, “money in your hand” type of loan which is offered by private loan companies. Also known as a cash advance loan, in reality they are just loans for people with bad credit. They usually range from $100-$500, but repaying your loan itself isn’t the trap. Payday loans are given with high fees, interest, finance charges and APR, and once they’re all added up you end up owing a lot more than you borrowed. If you pay the balance on-time and in-full you won’t incur major fees, but if you “roll-over” the loan you have began digging a hole for yourself. Payday loans are unfortunately one of the few opportunities for quick cash, and although credit cards fall under a different context, they can be just as destructive.
Credit cards are more prominent in everyday life than payday loans, however the bottom is much deeper on the problem you can create. The spending limit on your credit card depends on your credit score, but most are usually around $1,000. If used wisely, credit cards can propel you into a promising financial future. But if you max out your balance and default on your payments, you will not only owe the balance, but also all of the fees that apply. It will also raise your interest rates on future loans, so one mistake can affect you in a number of ways. Credit cards are useful when handled properly, but certain scenarios with payday loans and credit cards will declare the winner.
If you need a long-term loan option for purchases, credit cards are the way to go; that is of course assuming you will make your payments. But if you have maxed out your credit cards and need fast cash for an emergency, payday loans are your only option. So the outcome of the debate rests upon the situation you are in:
- If you have a credit card, stay on top of your payments and keep an open line of available money in case you need it. Having your card maxed won’t allow you to use it when you really need it, but if you don’t have it maxed a credit card is your best option.
- Only as a last resort, a payday loan can save you in a time of desperation. The fees are high, but if you pay the amount owed on time you won’t be too deep in the hole. Payday loans offer immediate cash, and you will pay for the accessibility.
So a credit card wins in this scenario, but make sure you are using an existing card. If you are planning to open a new credit card account for a $300 emergency, go with a payday loan. All in all, be wise about what your best option is and in either case, if you pay off the balance as your agreement states you should have nothing to worry about.
