Top tip: Use a credit card instead of a loan

If you think you need a loan, think again: a credit card could be a better option.

For relatively small borrowing amounts – £3,000 or less - unsecured loan rates aren’t that competitive. The lowest available for £3,000 is 11.9%. Using a credit card could work out much cheaper. However, which card and exactly how you use it will depend on why you need a loan in the first place…

The 0% option

If you’re looking to make a large purchase and you can pay with plastic, then it’s straightforward: a credit card that offers a long interest-free period on purchases is what you need.

Currently, the best deals are the Sainsbury’s Credit Card, Tesco Clubcard Credit Card and Virgin 12/12 Credit Card, all of which have 12 month 0% offers on purchases.

How to get money from your credit card to your current account

One of the reasons many people take out a personal loan is because they need money to pay for something where credit cards aren’t accepted; home improvements and building work are common examples.

But some credit card providers will allow you to transfer the credit you have available on your card, into a current account giving you access to cash as a loan would. It’s called a money transfer.

Virgin and MBNA both allow money transfers. With the Virgin Credit Card you benefit from 14 months interest free, while the MBNA Platinum Card has a 13-month interest-free period on money transfers. However, there is a slight sting in the tail: if you take advantage of this facility you’ll be charged a 4% fee. That said 4% is still a significantly cheaper option than a personal loan – you’ll pay £120 to make the money transfer compared with £187 in interest if you get a £3,000 loan at 11.9%.

The key to credit card success

Work out how much you need to repay every month to ensure that your debt is cleared by the time the 0% period ends – and make sure that’s what you pay. Otherwise the interest you’ll start accruing at that point and you could wipe out the savings you have made by opting for a credit card over a loan. Virgin charges a standard annual percentage rate of 20.9% on money transfers, while MBNA charges between 20.9% and 27.9%.

Is there anything to be aware of?

If you opt for the credit card route, bear in mind that you won’t know what credit limit you’ll be offered in advance – you may be offered £5,000 but you could be offered a £500 limit. Therefore there is a risk that the limit you are given is lower than the amount you need to borrow.

Also, the leading credit card (and loan) deals are only available to those with excellent credit scores, so if your credit history is less than perfect there is little point in applying. Instead you may be better off applying for a less competitively priced product that you stand a better chance of getting, as declined applications can negatively affect your credit score.

Any further advice?

Before you make an application for any form of credit, it’s worth checking your credit file to make sure the information on there is correct. If anything is wrong, you can make a notice of correction – this is well worth doing as it could mean the difference between your application being accepted or declined! You can apply for a copy of your credit report through our credit checking channel.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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