Credit Card vs. Payday Loan: Which One Do You Really Need?

The issue of looking for the most favorable borrowing option never loses its relevance in the USA and especially against the background of economic recession caused by the COVID-19 pandemic that affected many households.

As recent surveys show, over half of the respondents in the USA (56%, according to Bankrate) do not have enough money in their emergency fund to cover a $1,000 emergency expense right away. Therefore, borrowing money is a common practice among people of any age, employment, socio-economic status, etc.

Only about 20% of Americans have never borrowed money from either their family and friends or financial institutions. As for the other 80%, credit cards and payday loans remain the most prevalent options to cover unplanned expenses from year to year. Given this, it won’t be superfluous to consider these financing options in more detail. Can we state that one is better than the other? Or do they just fit different circumstances? Well, let’s figure this out.

Explore Key Differences Between Payday Loans and Credit Cards

Credit Card

A credit card is the most common example of revolving credit. This means that a line of credit remains open over time, even if a borrower pays the full balance, and automatically renews within the specified limit as soon as the debt is paid.

To maintain revolving credit, you need to make only minimum regular payments. The minimum monthly payment is a portion of the current balance calculated based on the outstanding balance on the credit card, interest rate, and other potential fees.

However, you typically do not have to pay any interest if you pay off your balance in full by the beginning of the next pay period.

Payday Loan

Unlike credit cards, a payday loan is a form of closed-end credit. So, this short-term loan for a small amount must be repaid on the due date in one lump-sum payment plus fixed interest.

The payday loan amount can vary from $100 to $1000, depending on a particular lender and your income, credit score, etc. The typical repayment term for a payday loan ranges from two weeks to one month because, as the name suggests, the loan must be paid back by the date you receive your next paycheck.

Consider Your Needs and Priorities

Choosing the right loan is always individual and depends on your unique circumstances. We cannot just compare interest rates and claim that one borrowing option is better than others without considering what is crucial for a particular borrower right now.

Therefore, let’s evaluate the features of credit cards and payday loans from different perspectives.

Loan purpose

It’s simple: the reason you need a loan impacts the type of loan you choose and the loan amount sought. Payday loans allow you to receive money into your account as quickly as possible (sometimes, on the same day). Thus, they provide an excellent option to cover emergencies like urgent car or home repairs, unexpected medical bills, etc.

On the contrary, credit card approval and receiving can take much longer, usually about 7-10 business days. Also, not all bills can be paid with credit cards (like rent, utility, etc.).

However, with a credit card, you can build your credit history, benefit from cashback and other bonuses, and enjoy an interest-free period of up to 45 days as long as you pay your balance in full by the due date.

Eligibility criteria

Unless you have an exceptional credit score of over 800, it is expected that not all loan options are available for you. So, you will have to consider not only your desires but also opportunities.

Concerning loan eligibility criteria, payday loans confidently give odds to credit cards. While a solid credit score (about 700 and higher) is necessary for almost all types of credit cards, the requirements to get a payday loan are much less stringent.

Although poor credit will affect the offered interest rate, you have a good chance of getting a payday loan regardless of your credit score. Moreover, some direct lenders specialize in offering payday advances for bad-credit borrowers.

To sum it up, credit cards typically come with more favorable terms and lower interest rates, but payday loans are easier to get, and they can be a real salvation in an emergency.

Money Management Style

The difference between closed- and open-end credit cannot be weighed in favor of any of these loan types. However, it is still worth considering the features of credit cards and payday loans in terms of which kind of debt would be more comfortable for you to manage.

It’s more of a psychological point. For example, for some people, an open line of credit may carry the potential to borrow (and spend) more than needed. So, if you need a specific amount of money for a certain cause, it can sometimes be more reasonable to take out a payday loan, repay it on the due date, and leave it all behind.

On the other hand, if you are confident in your ability to pay your card’s monthly statement balance in full each month, you can avoid paying interest ever and enjoy many other credit card perks.

Ultimately, we are all unique, as well as our money management behavior. Improving your financial literacy and building an emergency fund is always good. Yet, if you need to choose the loan option right now, you should proceed from your current (and not ideal) conditions and capacities without blaming yourself.

P.S.

Credit card usage has long ago become an integral part of the American way of life, with almost 70% of adults having at least one credit card. Along with that, 12 million Americans (including those who already have credit cards) still use payday loans each year.

So, even though credit cards and payday loans have more differences than similarities, each of these borrowing options has its function and could come in handy in particular circumstances.