A personal loan is typically used for purchases, emergencies, or debt consolidation. Personal loans from banks and credit unions are based on your income and credit score. Eligible borrowers can typically get funds quickly, which is why they are a common loan option.
However, if you own a credit card, you may have another loan option sitting in your wallet. More than 175 million Americans have at least one credit card in their wallet.1 A loan from a creditor could provide fast financial relief, but is it worth it? In this article, we’ll take a look at what it means to take on a loan using your credit card.
What Are Credit Card Loans?
These loans provide a lump sum that you borrow against your credit card limit. Just like you would use your credit to purchase, some cards will offer a personal loan option. Just like a credit limit, the balance of your installment loan will depend on your income and creditworthiness.
Having a high credit rating and an excellent credit history can help you get the most money.
Many borrowers use these loans to consolidate credit card debt or pay off high-cost expenses. The best person to talk to about getting credit card loans is a credit card issuer. You can generally contact a creditor by phone, email, or in person at a store location.
If you seek out a new creditor, remember to ask about potential fees. The annual fee and cash advance fee on a credit card varies by credit card company. If you are interested in working with a creditor, ask about their various fees before applying.
The Application Process
The minimum available is about $500. Your creditor may approve a higher loan amount based on your creditworthiness, spending habits, and available credit. You can get the most money from a credit card lender by shopping around and comparing your options. But remember that a low credit score may prevent you from getting the maximum loan amount from a creditor.
After you agree to the loan terms (interest rates, fees, and monthly payment schedule), your money becomes available to you. The entire application process typically takes a couple of business days.
The Interest Rate
Some creditors offer promotional interest rates for new customers. These grace periods can help borrowers avoid paying any interest fees for a few weeks or months. But once the grace period ends, the applicant must pay the standard rate they qualify to get based on their creditworthiness. It’s critical to know what your rate will be after the grace period ends.
The Repayment Process
You can repay a loan amount on the due date every month like any other personal loan. Credit card loans have terms that give borrowers anywhere from six months to five years to repay. Borrowers can use their online account to see what the current balance of their loan is at any time.
The minimum payment on the loan differs depending on the amount you borrow and the lender. Ensure you make payments on time, or you will have to pay a late fee. The late payment fee is typically a flat fee, although some lenders charge a percentage of the outstanding balance.
If you fail to make at least the minimum payment by the monthly due date, then you will probably have to pay a late charge. The cost of a late charge depends on the lender and the number of late payments you have made.
Credit Card Consolidation Loan
Debt consolidation is a refinancing process that allows a borrower to merge various existing debts into one financial account. Many people use personal loans for debt consolidation, but you could also apply for a credit card consolidation loan if you need assistance paying off existing credit card debt.
Debt consolidation loans are a debt management tool that combines multiple credit card balances into one monthly payment. With credit card consolidation loans, you may be able to pay off credit card debt promptly. Credit card consolidation loans may offer a lower rate that allows borrowers to pay less interest.
Loans and Your Credit Score
Your credit score will play a part in nearly every loan application process. If you’re thinking of taking out a personal loan, it’s essential to know that it could affect your credit score in the long term.
What is a Credit Score?
A credit score is the product of a mathematical algorithm that compares your credit information to the data of millions of other consumers. Your credit score provides a general indication of your creditworthiness, created from a review of your relationship with your past and current creditors—which is why every potential lender uses your credit score to help decide on your loan application.
Where Do Credit Scores Come From?
A credit score is a number that is calculated based on the information in your credit report. Between 300 and 850, this number can affect what kind of rates you may be offered in the future. The national average credit score in the United States is 714.2
The higher the score, the better the terms are for obtaining loans, renting an apartment, and other services. But not all credit scores work the same. That’s because there are a variety of scoring models from the three major credit bureaus, so it can be challenging to predict how it will affect your score.
These are the five main factors that determine most credit scores:
- Your payment history.
- The amounts you owe.
- Length of your credit history.
- New credit you apply for.
- Types of credit you use.
Credit Utilization Ratio
Credit utilization is a measurement of how much of your available credit you are using at any given time. For example, let’s say you have a credit card that has a limit of $1,000. At the end of a month of spending, the balance on the card is $200. That would make your utilization ratio 20% (20:100).
You should try to keep your credit utilization below 30%. For example, if your credit card has an $8,000 credit limit, you should try to keep a balance of no more than $2,400 on that card.
Although your credit utilization can heavily affect most personal loan decisions at a bank, a personal loan on your credit card does count the same way as a typical purchase. Personal loans are installment loans with a fixed monthly payment. On the other hand, regular credit card activity can fluctuate month-to-month, so it better indicates your actual spending habits.
Credit History/Age of Credit
A credit report lists all of your past and current credit accounts to give lenders insight into how you’ve handled them in the past. A long history of credit accounts will provide great information to creditors about your relationship with your credit card debt over time. Credit history will also help lenders make predictions on your future habits, which will affect the personal loan amount, interest rates, and services available to you.
In addition to not having a credit card at all, your credit history can be affected by either refinancing other personal loans or canceling a credit card after it is paid off.
Your payment history is the record of all the on-time and late monthly payments a person has made to their creditors. Payment history is the most crucial part of your credit score; it gives potential lenders clear information about your ability to repay the money that you owe.
For example, when you don’t make a monthly payment for more than six months, your account is sent to a collection agency—a move that can deduct as many as 100 points from a credit score. This is why we always remind you to pay your bills on time!
Advantages and Disadvantages of Credit Card Loans
There are pros and cons to every financial product. If you are thinking about using this type of loan to consolidate credit card debt or finance a large purchase, it’s in your best interest to learn about the various advantages and disadvantages before submitting an application form.
Advantages of Credit Card Loans
This type of loan can be disbursed quickly. Since there is no credit check or extensive application needed, it’s possible to get your approved loan amount more quickly than a traditional loan. You can apply at any time; the process is as easy as logging onto your online account or speaking with a customer service representative at your credit card company.
Since each monthly payment is added to your credit card payments, you don’t have to worry about sending off payment or adding a new item to your budget.
Disadvantages of Credit Card Loans
Taking out a loan is detrimental to your credit health—even if you intend to use it to consolidate debt. These loans can also have different interest rates that may differ from your annual percentage rate (APR), depending on your creditor.
An Overview of Pros and Cons of Common Loan Options
|Personal Loan||Lower interest rates than credit cardsFixed repayment schedule Can be used for a variety of purposes||Requires good credit for the best rates Some loans have origination fees Larger loans may require collateral|
|Merchant Cash Advance||Quick access to funds No need for perfect creditRepayment aligns with sales volume||Very high interest rates Can create a cycle of debt Reduces daily cash flow|
|Peer-to-Peer Loan||Potentially lower rates for good creditFast application processMore lenient credit requirements||Higher rates for poor credit Origination fees Not available in all states|
|Title Loan||Fast access to cash No credit check||High interest rates Risk of losing your vehicle Many have hidden fees|
|Balance Transfer Credit Card||Can reduce interest on existing credit card debt May offer a 0% introductory APRCan simplify payments by consolidating credit card debt||Balance transfer fees High APR after the introductory period Requires good credit for approval|
Alternatives to Credit Card Loans
Instead of getting a loan from a credit card company, be sure that you have considered a personal loan. You can apply for a personal loan with a bank, credit union, or private online lender.
Getting an unsecured personal loan can be a solid option when you need money for an unexpected expense because it can be used for almost any expense. Though it’s possible to get a secured personal loan, carefully consider whether you want to risk using a personal item to get fast cash.
Personal loan borrowers receive a lump sum that they pay off through monthly installments. Every personal loan lender will have different qualification requirements, so a bad credit score may not disqualify you. A personal loan can typically provide a small or substantial loan amount in your bank account, depending on the lender and your creditworthiness.
Difference Between Personal Loans and Credit Card Loans
A personal loan is a better choice for significant expenses that will take a long time to pay off. Since credit card debt carries higher interest rates than personal loans, it’s better to use a lower interest rate on more significant purchases.
As we discussed, getting approved for a personal loan depends a lot on your past and current financial behavior. But the personal loan you choose depends on your financial goals.
Merchant Cash Advance
If you are a business owner that needs a loan you can repay quickly, cash advance loans might work for you. Merchant cash advances are available from the service providers that process your customers’ credit card transactions.
Instead of a monthly payment, you can repay this kind of loan with a portion of each transaction you conduct. Merchant cash advances can be tricky; their high-interest rates can eat into your profits if you don’t pay them back quickly.
Conventional personal loans from financial institutions like banks and credit unions are often restricted to potential borrowers with good credit. With a peer-to-peer loan, borrowers connect with investors or investment groups looking to provide financing to people who need money.
A relatively new personal loan option, peer-to-peer lending, gives people with bad credit a better chance of getting a lower interest rate on an installment loan. Traditional lenders may rely more on your credit score to determine approval and a loan amount, but peer-to-peer loan investors consider factors like credit history and income to determine which lenders to finance.
Peer-to-peer loan providers are investors first; they watch consumer behavior and market trends across multiple industries to maximize profits. Peer-to-peer lending is less focused on your financial past and more concerned with the future. The primary qualifying factor lenders are looking at is whether or not you will pay back the peer-to-peer loan amount on time.
If you own your car, motorcycle, RV, or truck, you can put up the title—the paperwork outlining your ownership—as collateral. A borrower could receive a direct deposit loan amount worth up to 25% of the car’s value in exchange for that title.
Title loans are no credit check loans that are reasonably easy to get. This means people with different credit scores can usually get approved for these personal loan alternatives faster than traditional ones. Title loans are quick cash loans that can be processed, approved, and sent to your bank account within the same day.
You can repay a title loan in installments or all at once. If you miss any payments, the title loan company may choose to repossess your vehicle and sell it to recoup the money they lost from your loan. This action occurs with most direct deposit loans, but as with any loan, you should always read up on what happens if something goes wrong.
While a title loan might seem like a good idea, they are very risky. No one wants to lose their vehicle. And if it’s the only vehicle you have to get to work or take the kids to school, it’s even riskier. Other unsecured loan options may be better and safer.
Balance Transfer Credit Card
A balance transfer credit card is a type of credit card consolidation loan, although it functions as a traditional credit card. A balance transfer card allows borrowers to transfer their existing credit card balances to a new account in an effort to simplify their finances and save money on interest fees.
But while balance transfer cards are often used as credit card consolidation loans, they can be a pricey option. Transferring your credit card debt may require you to pay a balance transfer fee. This fee is typically a percentage of the total debt you transfer. If you move a lot of debt, you may have to pay a significant fee.
This type of credit card consolidation loan typically offers a 0% interest promotional period for new applicants. However, this promotional rate usually only lasts a few months and then skyrockets. It’s critical to understand what the standard interest rate will be after the promotional period if you decide to sign up for this type of credit card consolidation loan.
FAQs on Credit Card Debt
Interested applicants can apply online or in person at a local brick-and-mortar. You will generally need to provide basic personal information and supporting documentation.
Credit card loans can come in various forms, such as balance transfer loans, which can help manage credit card debt by moving your balances from one card to another, or cash advance loans, where you borrow cash against your credit card’s limit.
Qualifying for credit card loans typically requires a good credit score, a history of responsible credit use, and sufficient income to repay the loan. Your credit card balances and how well you’ve
managing them can also affect your loan approval.
The interest rate on a revolving credit loan can vary widely based on your creditworthiness and the lender’s policies. It’s often higher than the rate for regular purchases on the card, so it’s important to compare rates to save money.
Fees can include origination fees, late payment fees, and potentially a higher annual fee for the card. These fees can add to your credit card debt, so it’s important to understand them before you borrow.
Credit card loans are regulated by laws such as the Truth in Lending Act, which requires lenders to disclose all loan terms, and the Credit CARD Act, which provides additional protections for credit card users. These regulations help ensure fair loan approval processes.
You can typically get this type of loan from your existing credit card issuer. Some banks, credit unions, and online lenders also offer these types of loans. For instance, you might be able to get Discover personal loan funds if you’re a customer.
It’s advisable to shop around and compare offers from multiple lenders to find the best interest rates for loans. This can help you save money and make debt consolidation more effective. Always consider the total cost of the loan, not just the interest rate.
A Final Note From CreditNinja Regarding Credit Card Loans
Many borrowers use credit card loans to consolidate credit card debt or get money in their bank account for necessary expenses. However, the high interest rates and fees may result in further financial issues.
Before you apply for a new loan to tackle credit card debt, medical debt, or other outstanding debt, reanalyze your budget to free up some income. And if you must borrow money, your best bet is to find a low-interest loan with fixed monthly payments that you can afford, such as a personal loan.
A personal loan could help you get the money you need the same day.* At CreditNinja, we offer an easy online application process and competitive interest rates. Learn more about our online loans today.