Understanding the Choice Between Loans and Cards
There have been lots of offers in the mail and email with credit card applications and personal loans, and it’s not quite clear which of the two are actually more beneficial. Should you take the personal loan or should you take the credit card out? Should you even take advantage of both? Are they even the same? So many questions. If you are facing that dilemma and having the same doubts, this is the right place because we’re going to talk about it exactly today. Learn More
Calculating Your FICO Credit Score
Should you go the personal loan route or should you go the credit card route? Before diving into any of the analysis, it’s important to first understand the breakdown of the FICO score. For those who are brand new to the whole concept of credit there are people from all kinds of financial educational levels and also people from all over the world living in the US for whom this might be the first time getting introduced to FICO it’s basically a scoring system to show your credit score, to see how responsible or irresponsible you are.
Major Factors Influencing Your Scoring
It helps you understand your weak points so you can actually work towards making it better. The FICO score is broken down into multiple categories. The first one at 30% has to do with the amount that you owe whatever amount of money that you owe in relation to all of your credit history. Then 35% is going to go towards timely payments. That’s why they say that you should never be late with any credit card payments because if you are late then it’s going to hurt your credit score in a negative way.
Understanding Categories and New Credit
Then there is 10% that has to do with new credit. Every time you apply for a credit card, that’s why you always hear that if you apply for a new credit card your score is going to drop a couple of points. That has to do with new credit, but it’s only temporary eventually it will come up. Then there is also 10% and 15%. That 15% has to do with the length how long you have had your credit history. Is it five years, ten years, fifteen, twenty, sometimes even fifty years. That is fifteen percent of your FICO score.
Defining the Concept of Credit Mix
The remaining ten percent has to do with credit mix, and this is what we’re going to cover today. What is meant by the term credit mix? On one end there are credit cards and on the other end there are personal loans. A credit mix is a mixture of different types of credits. A personal loan is a type of credit. A credit card is a type of credit. A mortgage is a type of credit. A car loan is also a type of credit. That’s what FICO is referring to with having that mix, which means that a personal loan and a credit card are a type of credit but they’re not the same thing. They belong to the family of credits. They’re both used to
How Personal Loans Actually Work
report on your FICO score to measure how responsible you are with the payments and they’re both meant to provide you liquidity so you can use that money to do anything you want, but in essence they’re not the same. For example, if you apply for a personal loan and get approved for ten thousand dollars, you can use that ten thousand dollars towards anything you would like whether it’s on the renovation of your kitchen, an emergency, or maybe to pay for your tuition. Whatever it is, you can use that at your discretion. But personal loans have a term. That means you only have a certain amount of time to pay it off.
Comparing Fixed Terms and Revolving Lines
If you get approved for ten thousand dollars, you could get the loan for five years, seven years, or ten years. But that doesn’t mean that the money is going to be available for that period of time it only means that you have either five or seven or ten years to pay it off. If you borrow ten thousand dollars and you paid it off in two years, then that’s it. You don’t get access to that money anymore. Yes, they gave you five years but you paid it off early. It won’t appear in your credit anymore. It will still be part of your credit as a loan that you had, but it will no longer be reported on because you already closed it out by paying it off.
The Mechanics of Revolving Credit Cards
The credit card on the other hand is what they call a revolving credit. Which means it goes around and around. Think of it as a revolving door. You have ten thousand dollars available, you can use part of it. You can use all of it, you pay it off, the balance is back to zero. And you can use it again. There’s no expiration date on it.
Differences in Applying for New Credit
A personal loan is very similar to a mortgage. Or a car loan in the sense that once you use it up, that’s it. A credit card can go back over and over. The only way you can have access to the personal loan again is by applying for the loan again. So if you use it all up and you need it again, you have to go to a bank. Request an application form, and then apply. With a credit card, all you have to worry about is to make sure you don’t go over the limit. That you keep your limit under control, and that you make your monthly payments. You do not need to reapply.
Comparing Interest Rates Across Platforms
It varies depending on the market, but interest rates on personal loans are usually higher typically starting at 24.99% as opposed to credit cards that could start off at 15.99% or sometimes even 13.99% depending on the bank. However, depending on your credit history, you might have a really bad FICO score and might not start with exactly 15.99% or 13.99%. You can start off with a credit card at 24.99% just like you would with a personal loan. That’s why it’s important to read the terms and conditions of the credit card application. But usually for the most part, personal loans do start with the higher rate.
Analyzing Which Line of Credit is Better
Personal Preferences for Convenience and Speed
It all depends on your individual circumstances. We don’t all have the same circumstances, and we all have different needs. That’s why it’s important to educate yourself and understand the pros and cons of each of these different lines of credit, so that way you will know which one to implement when the time is right, or perhaps even use them both. Generally, leaning more towards using a credit card makes sense because you don’t have to deal with having to apply for a line of credit every time you need to use it.
Managing a Strategy with Multiple Cards
With the credit card, you can use it, pay it off, and then come back a year or six months later and use it again without having to go through the entire application process putting in your information, your social security number, your address. Even though it’s fast, it takes time and effort from your busy schedule. Another reason to lean more towards the credit card route is the fact that you can have multiple credit cards. You can have as many credit cards as you like; there’s really not a limit as long as you do it right. You apply gradually and you maintain all those credit cards gradually. And you can have lines of credit that stem back from 10 years ago, 20 years ago, and you can have new credit cards that could be two years old or maybe six months old.
Limitations of Frequent Personal Loan Applications
As opposed to personal loans, you can have one or perhaps even two at most. You don’t get to apply for personal loans over and over again because it’s something that is not forever you pay it off and then it gets eliminated. So it’s very difficult to keep up and maintain. It’s more maintenance on the bank side, having to create a new loan and then close it, create it and close it, create it and close it, especially if it’s for such a short period of time. Read More
