Credit card companies want to turn your unused line of credit into cash that you can borrow for things like home renovations or unexpected expenses. But these credit card loans may not be the best choice for your wallet or your credit score.
Two of the largest credit card issuers, Citi and Chase, offer the Citi Flex loan and My lawsuit loan to eligible cardholders. While these loans are quick, convenient, and cheaper than cash advances, personal finance experts say loans are still expensive and can lower your credit scores, making it harder to get credit with loans. low interest rates in the future.
Before you agree to this seemingly simple way to get money, consider the risks and compare your alternatives.
How a credit card loan works
You can view a credit card loan offer on your online account or on the bank’s mobile app. Although you will need to select your desired loan amount and review your options, you do not have to make a formal application or undergo a credit check to receive your loan. This is because you are not applying for a new form of credit, but are using the limit already available on your credit card.
“It’s very tempting because it’s so quick and easy with no app,” says David Rae, a certified Los Angeles-based financial planner. “If you’re already in debt, it can snowball and become a big deal.”
The amount you can borrow depends, among other things, on your available credit, your monthly spending habits and your creditworthiness. The lowest amount you can borrow is $ 500.
Once you choose a loan amount and repayment term, the issuer transfers the cash to your bank account within a few days. Citi will also mail a check.
Loans have repayment terms of six months to five years, and monthly repayments are added to your card’s minimum payment, so you only have one payment to track. Citi and Chase say they report payments to credit bureaus as credit card payments, not separate loan payments.
Having different types of credit on your reports can have a positive impact on your scores. In this case, “there is no additional benefit to your credit score beyond just having a credit card and making a payment,” says Rae.
You can continue to use your credit card, but you’ll want to track your balance and stay under the credit limit to avoid costly charges. You also won’t receive cash back, miles, or points with the Citi or Chase loan.
Costs and risks
Rae advises that loans should only be considered emergency spending if you don’t have any savings, rather than discretionary purchases.
“If you’re trying to book a vacation or buy clothes, I wouldn’t recommend this product,” he says.
Credit card loans can cost less than cash advances, but they don’t come cheap.
For example, a three-year $ 5,000 Citi flexible loan at 9.99% APR would result in monthly payments of $ 161 and total interest of around $ 800.
Taking out a credit card loan also increases your credit utilization rate – how much of your credit limit is used. Most financial experts recommend keeping your total usage below 30%, and the lower the better for your score.
This loan can push you above that threshold and lower your credit score, says Bruce McClary, spokesperson for the National Foundation for Credit Counseling.
Whenever you borrow, compare the interest rates of several loan options and consider features that strengthen your credit or offer flexible payment schedules.
Personal loans may offer higher loan amounts or lower rates, especially if you have excellent credit. They also show up as separate accounts on your credit reports, which helps to diversify your accounts and indicates that you can handle different types of credit, thereby increasing your scores.
If you are eligible, a 0% APR credit card is an interest-free loan, as long as you pay off the balance before the introductory offer period ends. Also, you can earn cash back or travel rewards with this credit card.