Picking the right credit product is an important decision that could save you a lot of money and help you optimize your finances in a better way. However, many people often make mistakes that cost them a lot.
When you search for credit cards, you will find that most financial sites offer them the best credit-building tool. And that’s true. Credit cards play an important role in your credit score. 35% of your credit score is affected by your credit cards.
But, what about the most important element of every credit product?
For many people, it is how much money actually they can get?
It seems like all big sites that promote credit cards promote them mainly for building credit. But what about the money?
The truth is:
You can get much more money from your loan vs. from your credit card!
If your focus is to get more money, then a loan would always be a better choice.
Because the loans could always be set with lower monthly fees than credit cards if the loan amount is equal to the credit card limit.
Let’s explain that.
You know very well that lenders evaluate multiple criteria to determine your creditworthiness. These are credit score, debt, debt to income ratio, and many more.
However, today, we will focus on your monthly creditability.
In brief, this means:
How much you can afford to pay per month on your credit products.
And to determine this, lenders do a quick count, which looks like this:
Your Credit Ability = % of (Your Proven Income ) – Your Monthly Fees
Note that we have mentioned a percentage of your proven monthly income, NOT your proven monthly income.
But why, and what does that mean?
Most lenders wouldn’t approve your full income. For example, if you make $3,000 per month, lenders would approve about 70% of this roughly. This is because lenders want to protect people from getting into debt or getting a loan that is very hard to be paid, because of insufficient income.
Your monthly fees are all fees that you pay for food, rent, and so on.
So, back on the example.
Say that your proven income is $3,000 per month. Say that your lender approves $2,000 of it. Say also that your monthly fees are about $1,000 per month.
Then your monthly creditability would look like that:
$2,000 – $1,000 = $1,000
So, you can pay up to $1,000 per month for your loan from a lenders’ standpoint.
Note that the term credit ability means something like your free monthly cash flow!
Think about your creditability as something that will determine how much money you can get.
And now …
Why can you obtain more money through a loan instead of a credit card?
Because credit cards lead to higher minimum payments than monthly loan fees if you set your loan for a longer repayment period of time.
And your loan minimum could always be set to be lower than your credit card minimum.
But not always…
It works only if you choose a longer repayment plan.
A $100,000 loan for 10 years would lead to about $1,000 monthly fees.
$100,000 credit card limit would be about $5,000 minimum.
People can get more money from loan products instead of credit card products. And the difference is about 5 times. But this is a rough count. The exact difference could be counted only after you find the exact loan and credit card values.
This applies only if you pick a longer loan repayment plan.
Back on the example:
Say that you get a $100,000 loan with a 5 years repayment plan. This would mean $2,000 monthly fees.
The same amount would lead to $10,000 monthly fees for 1 year.
As you can see, lowering the repayment plan leads to higher loan fees and less amount that people could get because the lender would determine the lack of ability to pay your loan.
So, what’s the problem with credit cards?
The problem is that they come with a minimum set based on the limit and the APR and can’t be changed.
Tip for people who are looking for more money.
Always get loans instead of credit cards.
You have $1,000 monthly creditability.
You have a credit card with a limit of $10,000, which leads to a $500 minimum.
This credit card minimum will lower your monthly creditability, and now it is:
$1,000 – $500 = $500
And for the remaining $500, you can get no more than a $50,000 loan.
Because $50,000 would mean about $500 per month if the loan is set for 10 years.
Technically you can’t. All legit lenders would consider a lack of ability to pay your monthly fees and credit card minimum.
So the only way is to refinance your credit card with the loan.
Back on the example:
If you have a $10,000 credit card limit and want to get a $100,000 loan, you can refinance your credit card.
That way, the lender would pay $10,000 for your credit card, and you get the remaining part, which would be $90,000.
But you also have to close your credit card.
Lenders would require that you close your credit cards.
Credit cards indeed have a higher impact on your credit score. But, it is not true that loans don’t build credit.
Both build credit if you use them correctly.
So, the main problem is how you use them.
For a loan, this would mean:
For a credit card, this would mean:
Many studies show a strong correlation between credit card limits and the spending habits of people.
It looks like that.
On the day that you open your account, you plan to use your credit card only at the end case. You are almost sure that you will only use a small part of the amount and give this back as soon as possible. This looks financially correct.
But the truth is that you start to feel that the money on the card is yours in time.
You start using and spend them like your money. But they are NOT yours.
And that is how people get into debt.
This problem doesn’t exist with loans because you know exactly your amount and your monthly minimum.
Whether you would choose a credit card or a loan is up to you. But this is a critical financial decision that could save you a lot of money and problems.