Many of us have a credit card and probably use it to do a lot of our shopping. It is easy to use one in exactly the same way as a debit card and not really think of it as a loan. In some ways it is not the same, but there are similarities and it really depends on how you use the card. It is worth understanding more about how it works so that you are more aware of any costs of the card that you might have to pay.
How the Card Works
A credit card allows you to make purchases without paying or them immediately. So you can use them instead of cash in a shop and then you will get a bill at the same time each month which will list all of your purchases. You will then get the option to repay everything that you spend and not pay any interest or charges or to repay a minimum amount where you will have to pay interest on the remaining balance and then can repay at your leisure. You can also pay any amount in between these two although the statement does not normally make this so clear. The costs of the card will depend on which card you choose as they do vary between credit card issuers.
So as you can see, you can decide whether to pay interest and repay the money over a longer time and this is a form of borrowing. Or you can repay the whole balance and pay no interest and this is a form of interest free credit. This can therefore be classed as a form of lending and therefore a loan, however it is less controlled. With a conventional loan you will be expected to repay a certain amount each month until the whole of the loan and its costs are repaid. However, with a credit card you can choose any amount above the minimum to repay. In a way this gives you a freedom to plan your repayments to make them affordable for you and you have the flexibility of paying more off when you can afford it and less when you cannot. However, many people just pay off the minimum and do not think about paying off the full balance. This means that they take a very long time to repay what they owe and they pay a lot of interest. It is also hard to see the interest building up and how much you are paying for the loan because you pay off the interest in the minimum payment. If you added up all of those months of interest then you would be able to calculate how much the loan costs and this might motivate you to repaying it more quickly.
Repaying also takes self-discipline. If we use our money to repay the credit card then we will have less to spend on other things. It can feel like it is a great way that we can get more things and it is so important to think about the cost of doing this and whether you would still want those things if you knew how much they would end up costing you.
Is it a Loan?
So if you repay the credit card in full each month then although you get some interest free credit, it is not really like a loan as you pay nothing for the privilege. However, if you do not pay everything off each month, then you are treating the card like a loan. You will be paying interest on it as well.
It can be important to think of the card as a loan because it could help you to treat it more seriously. You should be considering the costs of using it as well as the convenience. Often a loan can feel big and be scary in some ways because of the amount of time it might take to repay and the cost of it. Although being worried and stressed is never a good thing, we do need to see the credit card as being as important as the loan though. We need to make sure that we are always aware of how much it is costing is and thinking about how we can repay it so that we are not paying more in fees than necessary.
For some people the fact that there is not an enforced repayment amount each month which will lead to the loan eventually being all repaid means that it feels different and lasts a lot longer than a conventional loan. It can feel like it is easier to manage and gives you more flexibility but there is also a risk that you will have it for much longer and therefore end up paying significantly more money for it. The interest rates tend to be higher than with a conventional loan as well, which adds to the cost even more.