Loans

Credit card or personal loan: which is better?

ANALYSIS
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Paying by credit card – the bill can be a rude awakening. Source: istock

People are quick to pull out their credit card when they’ve got their heart set on something – and it's easy to forget that the bill will also soon be on its way. If the amount is paid off promptly, there's nothing to worry about. But if you are toying with the idea of paying by instalments, you should really look closely at the small print first, because the interest can be prohibitively expensive. In this case, a personal loan is often the better choice.

The basic principle is this: credit card bills should always be paid off immediately and in full, because if you pay late or only in part, you will incur steep interest charges. But credit card providers don't make this very obvious – often you will only find the interest rate for partial payments or overdrafts in the General Terms & Conditions.

Beware the interest-rate trap

The fact remains: interest on credit cards can frequently be as high as 12%. Indeed, the figure is often many times more than that, such as when the provider cashes the interest on the total amount even though part of the bill has already been paid. Then the cost can soon mount up, and not only on large sums. Or, if you are using several cards at the same time, you can easily lose track of your payments – then, in the worst case scenario, your debt eventually becomes unmanageable and you are no longer able to pay. 

When excessive debt looms, it’s time to act

This is why it is recommended that for larger sums you take out a personal loan instead of charging them to your credit card. The same applies when making a number of smaller purchases, which when added together exceed your current budget.

But what if you already have credit card debts? Then it is time to take action – and refinancing may be a viable solution. This involves consolidating existing debts from various sources into a single personal loan. The monthly repayment is calculated on the basis of the available budget. Although this does not get rid of the debt, you can still benefit: there is only one bill to pay each month and the interest is much lower. It is currently around 4.5 to 9.95%, depending on your credit rating.

 

Credit card versus personal loan – it depends on the amount

To sum up: For smaller purchases, ordering on the Internet and making payments abroad, credit cards are practical and effective, especially if the amounts due can be paid on time and in full with each monthly invoice. But as soon as those amounts increase to a level that means you have to start paying them off over several monthly instalments, the credit card is no longer so attractive. This is when a personal loan works out cheaper, as the following example calculation shows. In this scenario, you could save 104.70 francs by taking out a personal loan instead of using your credit card.

  Credit card  Personal loan 
 Loan amount in CHF 5,000   5,000
 Duration in months  12  12
 Interest in % p.a.  12.0  7.9
 Instalment required  442.80  434.10
 Interest costs   313.70  209.00
 Total amount paid  5,313.70  5,209.00