Credit card, loan or overdraft? What’s the best option for me?
Managing your personal finances is a very important responsibility. While you can do your best to budget and save, financial setbacks do occur from time to time. If you do not have the money set aside to cover a setback, you will likely need to consider other options to pay for the expense. Three options to consider would be to use a credit card, take out a small loan, or even overdraft your bank account. It is important to consider the advantages and disadvantages of each when determining which option is best for you.
Use a Credit Card
If you have been hit with a financial emergency or surprise, one very popular option to consider would be to use a credit card to make the payment. When you use a credit card, you will be able to use this line of credit to make the payment today while being allowed to repay the principal balance at a time in the future.
The main advantage of using a credit card is that it is very convenient to do so. As long as you have a credit card available to you today with enough availability, you will be able to use it. Even if you don’t have an account open today, you can normally receive approval for a new card and receive it in the post within 7-10 days. The disadvantage of credit cards is that the interest rates can be high and falling behind on payments will result in even higher rates and fees, and can negatively impact your credit score. There are a number of credit cards which offer interest free borrowing over a fixed term, but it’s important to be aware of these terms as fees can hike when that term ends!
Take Out a Loan
Depending on the situation, taking out a personal loan could be a great option. When you take out a personal loan, you will apply for a loan through lender and then receive the within 24 hours of the application being approved. Loans tend to be better for longer term borrowing from 1 to 10 years, there are short term loans available which need paying off within a year, but these usually come at a price and can incur big fees.
Finally, you could consider adding an overdraft to your account. Overdrafts are for smaller borrow and usually run to a maximum of £1000, they are fairly instant to set up which means you can access the money quickly. However, overdrafts can be withdrawn or reduced by your bank at any time and interest free periods of borrowing usually have a set time frame which can mean you’ll pay interest after a year of using.
Ultimately, each of these options could help you to meet a financial obligation. It is important to consider the advantages and disadvantages of each when figuring out which is right for you. Going forward, it is important to make sure you repay the debt as agreed to keep the account in good standing and maintain a strong credit score.