Are Credit Cards the Cheapest Form of Borrowing?

Credit cards are commonly see as a low-cost form of borrowing money – but they can also be seen as an option used by the most vulnerable in societies.

In many cases this is harsh but fair, and thats where credit card borrowing falls down. But it doesn’t have to be like that, referring an article from The Guardian in  March 2018 entitled ‘tidy away your debt problems’. But before we break this down, let’s take a look at the different forms of debt:

Loans for long term use

This is where a loan is taken over 10 years or more. The debt is usually secured against an asset and is often used for the purchase of property for residential or investment purposes. The loan can be very cheap, usually no more than 2% above base rate, and very often is rolled over or converted/increased to another lender at the end of the term. Many people have a loan against their home for life. This is not seen as a problem as we all have to pay for somewhere to live whether we buy or rent.

Loans for short term use

Short term loans are typically taken out over a term to a maximum of 5 yrs and are used for a variety of reasons from luxury purchases to debt consolidation. The loan is usually cheap (depending on the applicants credit rating) and is generally at a fixed rate. Borrowers pay a fixed amount monthly and pay the debt of completely over the period. This form of debt is generally manageable, providing a borrower doesn’t take on commitments they are unable to meet.

Loans for monthly or daily use

These are loans taken out for a very short term, where the borrower has every intention of paying the debt of at the end of the month in which it was borrowed, thereby not incurring any interest. This kind of borrowing is very expensive and is typically offered by payday lenders or credit card co’s. In every case money is lent to the borrower and is expected to be repaid before any interest is due.

Unfortunately, in most cases the loan is not fully paid of and is often increased over time, making this form of borrowing incredibly expensive as it can turn monthly or daily debt into short term or even long term borrowing. Its this area of borrowing that can be turned to the borrowers advantage by converting the debt from the most expensive to the cheapest a borrower has.

How to use your credit card more effectively

It’s easy to do but requires constant monitoring and a dedicated repayment method.

Firstly, you should investigate co’s offering interest free borrowing on credit card transfers. You will find many options on comparison sites. There are plenty of them and most do not charge any annual fee. Take cards out with 3 or 4 co’s so that you have plenty of options should you need them.

Do not see these cards as available credit to spend on things you do not really need, see them as a fallback option should you require some forward spending or have an unforeseen financial emergency. It is very important that you do not see these card options as additional spending availability. If you do not have the willpower to use the cards only when really needed this strategy may not be for you.

Secondly, live as you always have done, using one of your credit card facilities for convenience buying and for any emergencies. At the end of the month pay of your credit card in full. Its only when you cannot pay of your credit card in full that you need to use other options. Lets assume you regularly pay of your card until you are hit with an unexpected bill, in this instance work required after a car service costing £2000.

Instead of looking to borrow the money from a payday lender, or keeping the debt open on your current credit card at a high cost or taking a loan over a fixed period short term, use your credit card.

At the end of the month when you cannot pay of the debt use one of your other cards to transfer the balance. You need to find out what credit card co’ is offering the best terms. Typically this will be 2% over 2 years. That means your charge for the £2000 credit will be £40. In most cases you can chose to pay this monthly or up front.

Thirdly, work out what you need to pay each month to pay of the loan within the interest free period i.e £80 pm in this instance, and set up a direct debit with the credit card co’. Make sure you pay this of every month.

Fourthly, when you are able to pay more of the balance do so. This may mean that the overall cost of borrowing will increase slightly, but it will also open up this cheap form of borrowing for future requirements. Far better to pay the debt of as soon as you can knowing that the interest element is very low. If you kept the debt with your convenience credit card the cost is likely to be 29-35% APR, meaning approx £600 pa.

Finally, If you are not able to pay of the debt within the interest free term just use another card offer to clear the balance. This will extend the term but it will be incredibly cheap. This is not ideal, but far better than paying normal credit card rates or taking a payday or short term loan where the interest will be higher and the terms less flexible.

So there you have it. Borrowing on an interest free basis from your credit card provider, if used correctly and paid of within the term, will be the cheapest way for you to borrow money for those necessary expenses. Just remember to put an affordable repayment method in place.

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