Credit Cards as a Credit Instrument
A comparison between credit cards and other credit instruments is incredibly difficult because there are so many financial products on the market that one gets dizzy, when time comes to choose how to borrow money. Additionally, there are so many differences among the credit cards themselves that it is an impossible job to consider all the options without omitting at least some of the possible choices. So, even if you have carefully analyzed all the available offers and you have given it a lot of thought, you can never be sure that you have picked up the best offer. But this is not necessary. If you have picked an offer that is good enough, you can pat yourself on the shoulder.
The first questions you need to ask yourself when you are hunting for credit are how much you need, over how many months/years you can repay it and how much a month you can afford to pay. If you need pocket money – i.e. under $1000 and you can repay it almost immediately or within a month or two, then credit cards are certainly the winner among credit choices. A personal loan can also be a good choice, especially given the fact that interest rates and charges for a personal loan might be lower than those for a credit card (if you keep a balance on it) but still everything depends on the particular offers.
On the other hand, if you need a lot of money, let's say $100,000 or more and you can't repay it for a month or two, then credit cards are your worst choice. But you hardly have to worry about it because anyway it is very unlikely that you will be able to borrow so much on a credit card. Actually, it is not very typical for credit card issuers to allow limits over $20,000, so even if you want to drown in debt you might not have the chance for it.
Credit cards are not a wise choice for borrowing a lot of money not only because such offers are rare but mainly because amounts in the range of $100,000 are allowed against a mortgage, or at least a collateral. You might think that you can avoid this restrictions, if you manage to get 10 or 20 credit cards, each of which has a limit of let's say $5,000. No, this is not a workaround. You will hardly be able to open so many credit card accounts, especially if you already owe a substantial amount of money.
But even if you can, this is certainly unwise. You will have fat monthly payments and you will not be able to repay your debt for years. As you already know, when you have a balance on your credit card, you are charged an interest, typically at the rate of 15-20% annually. Just for comparison, you can get a personal loan at about 5% interest rate. For a mortgage your might be able to get even lower rates but mortgage is a nightmare in its own. Besides you might not have property to mortgage, or even if you have, you risk losing it, if you happen to become unable to service your debt.
So, as it turns out, credit cards are good mainly for short-term borrowing of small amounts. This might sound like credit cards have a very limited scope but if you think a little, you will see that short-term borrowing of small amounts is the most common operation for the majority of people and if you stay within the safe limits of borrowing, credit cards might become your best friend – or your worst enemy!