Current Events > What Are The Big Differences Between Credit Cards And Loans?

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Was always warned to stay away from Credit Cards and Loans, no matter what from family and some school teachers

Got CC's, built up my credit score

Recently been getting offers to get a loan. Are they worth it? What are the big difference between them and CC's?

what's the loan for
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Loans charge you interest. CCs don't if you make the monthly payment. For interest free loans, the amount they give you is larger
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Loans typically have longer pay-off periods but far lower interest rates than a credit card, which means you are paying the loan off for longer BUT not necessarily paying more in interest. Loans are usually for specific purposes (buying a home, buying a car, starting a business, etc.). There are personal use loans, but again it's usually best to get this for a specific purchase. You could theoretically get a personal use loan, but if you take out a lot of money and then don't spend it, you're potentially spending far more than you would have to pay it off.

Depending on the nature of the loan, you may not have to pay much interest on it at all - it depends on the terms. Some loans let you put money directly towards the principal amount (the actual cost of the loan, NOT factoring in interest), which means you can pay it off directly and pay little if any interest. Other loans might actually penalize you for paying them off early >_>.

Loans usually have a specific pay plan to them - If you take out $1,200 for a 12 month loan, then expect to pay $100 for 12 months (plus interest) to pay it off.

A loan will only really benefit your credit score, and only if you're making *at least* the monthly payments on time and pay it off on time.

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Credit Cards have far higher interest rates on average, BUT this doesn't necessarily factor in unless you go past the grace period. I don't remember if it's federally set or not, but the grace period ranges somewhere from 14 days to 30 days (somewhere in that ballpark). Assuming it's 14 days, that means if you buy something with a card and then pay it off in a week, you only owe the original amount of that thing, no interest involved.

Because of the higher interest rate, you are *not* guaranteed to pay the card off in a reasonable amount of time if you only make the minimal monthly payments, and you are gonna be wasting a TON of money on interest if you only make the minimal monthly payments.

Credit Cards are more versatile. You have a credit limit and a cash advance limit. You can spend money up to the limit however you want - if you have a $1,000 limit and you wanna buy 100 Cokes with it then go for it. The cash advance limit is usually far less than the credit limit but you can still use it to get cash if you're in a bind.

Credit Cards help you build your credit score, AND... they oftentimes offer some sort of perks for using them. This ranges from travel rewards (use points to buy airfare or tickets/onboard cash on a cruise) to straight cash back to "shopping rewards" where you can use the points on things like electronics and furniture... Most stores offer a credit card that lets you get reward points for their store specifically (for instance, I have an Amazon card and I get 5% "cash" back on Amazon purchases, which means for every $100 I spent I get $5 to spend on Amazon; I also get bonus points for using it at gas stations and whatnot).

Credit Cards can be extremely powerful tools for building credit if you use them right. Even just using them for monthly expenses (gas, cellphone, internet, etc.) can turn a bill that is costing you money into a bill that can give you at least some cash back while developing your credit score.
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TL;DR - I would not get a loan unless I had a specific high-price purchase (car) or project (home improvement) in mind. Otherwise, they're just not versatile enough. Like trying to sail an aircraft carrier down the Amazon river - you could *probably* get it in there but there's not gonna be a lot of maneuverability.

Credit Cards are perfectly 100% safe, if you're using them responsibly. IE, do not change your spending habits just because you got a credit card. This is probably one of the simplest reasons people fall into unmanageable debt - they don't understand that the money they're using for clothing, video games, whatever, isn't just coming out of thin air and they don't understand how strong that interest factors in when they're trying to pay off the debt.

With a simple budget and spending plan you can avoid credit card debt 100% and get some perks in exchange.
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Different credit cards are intended for different uses. For example, some cards are 0% APR for a promotional period (usually 12 to 15 months). What this means is that as long as you make the minimum payment, you get charged no interest for those 12 or so months. The advantage of something like this is when you have an unexpected expense and can't afford it upfront, but you know if you budget accordingly, you can pay it off within that time frame. So say you have a medical expense of 2k you weren't expecting. But you can tighten your budget to free up $167 per month and basically put that towards the 2k. You pay it off in full before the period ends and all is well.

The danger comes in if you can't pay it off in time. Once the promotional period ends, whatever APR you qualified for is now the interest rate. So if you negligently charge 2k on a sick ass curved 4k TV and don't do anything but the minimum payments the entire time, suddenly you're now with 1,500 left on a card that charges 15% per month, or $225. That can get dicey to climb out of.

Other cards don't have a promotional 0% period, but have great rewards points. Those cards give you 2-5x cash back, or accumulate airline miles, or otherwise are just really good at charging regular monthly expenses. Charge your groceries, gas, utilities (that allow it) every month on it and pay it off in full. You don't get charged any interest, and you'll get more in points than you would from a debit card. The added incentive is adding an extra layer between your liquid cash/debit account for fraud protection. As long as you don't splurge on things you can't afford, there is no harm in using them and you only stand to benefit.

Loans are a different story entirely. Usually they are for larger expenses (cars, homes, businesses, education) and are more simple. Borrow a total amount, pay it off over an agreed amount of time, plus interest. The interest is usually more favorable than credit cards (presuming you carry a balance on a credit card). This benefit is moot if you don't carry a balance on a credit card. If you don't have a particular reason for a loan, there is no reason to get one just to have cash on hand since you're paying interest. But, if you need to finance a car or pay for your college, often people don't have any other way.
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