What is a credit card loan?
A credit card loan, or credit card debt, is any money borrowed when you use your credit card. Credit cards serve several useful functions, such as allowing people to pay for purchases when they either don’t have cash on hand or don’t want to use cash. People may also prefer to pay by credit card because it offers convenience, security and easy tracking.
When you buy something using your card, the issuer (usually a bank) essentially loans you the money to make the purchase. You will have to pay back the loan at a later date and will be charged interest after a ‘grace period’.
Secured and Unsecured Credit Card Loans
With the vast majority of credit card loans, the borrower does not need to use any property as security – this is an unsecured loan. If the borrower defaults, i.e. does not settle the debt, the credit card issuer has no recourse to a rapid way of recouping its loss.
If you don’t settle your bill by the grace period deadline (which is usually 21 days after the statement date), you will be charged interest from day 1 on any purchases you make.
As its loans are unsecured, the credit card issuer has to check the customer’s credit rating before… 1. deciding whether to lend him or her money, and 2. determining how much to lend.
If a borrower has no credit history or a poor credit history, i.e. a low credit rating, he or she may be able to get a ‘secured’ credit card loan. They will have to put up collateral, which the credit card company can then seize if they default on the loan.
In most cases, the collateral is cash – if you deposit $500 cash you will be able to make purchases using your card with a $500 credit line.
Many people say a secured credit card loan where cash is used as collateral is essentially no different from a debit card.
Credit card loans are expensive
When the ‘grace period’ is over, interest rates on credit card debts are usually the highest on the market for loans. Even though credit card debt is widespread, experts say it is one of the worst types of debt.
If you already carry a balance on your credit card you will not have a grace period, so interest charged on any new purchases will start immediately.
Credit card issuers prefer their customers to pay just the minimum payment, in fact, they encourage people to do this and promote the use of the card for long-term borrrowing.
You would be better off arranging a loan with your bank and clearing your credit card debt – your repayments would probably be much lower.
A study carried out by Lucie Kalousova and Sarah Burgard, both from the University of Michigan, found that individuals with credit card debt are more likely to forgo needed medical care compared to people with no credit card debt. Their likelihood of forgoing medical care rises with the magnitude of credit card debt. They reported their findings in the Journal of Health and Social Behavior.
Video – Credit card billing
In this video, William Peterson shows how the interest free ‘grace period’ works with credit cards, why it is important to pay off the statement balance in full each month, and the hidden danger of carrying a balance.