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What You Need to Know About Installment Loans & Credit Cards

Picture this: you come home to find your mailbox stuffed to the brim. Are you brave enough to reach inside and reveal what’s waiting for you? The thing is, the people you wouldn’t mind receiving mail from probably aren’t sending you a letter. They know your email address and phone number if they want to get in touch. That leaves the usual influx of flyers and even worse, a stack of bills with your name on it!

With payday still a couple of weeks away, you may not have the ability to pay everything that’s due on time without some help.

Some people would go straight for their credit card while others would apply for a personal loan. They both provide a way to pay for things when you don’t have the cash you need on hand, but it’s important to remember that they’re two very different products.

If you aren’t sure which one is best for your situation, keep scrolling. Today, we’ll take an in-depth look at credit cards before comparing them to installment loans, so you can make an informed decision the next time you need to pay for an unexpected expense.

What is a credit card?

You may already be familiar with credit cards, and although it may look similar to your debit card, a credit card is a completely different creature. While a debit card takes money from your bank account, a credit card charges your purchase to credit.

In other words, you’re borrowing money from the bank or financial organization whenever you swipe your card at a machine.

With few exceptions, a basic personal credit card is unsecured. This means you won’t have to put up property or other assets as collateral when you apply. Instead, the issuer will look at your credit history before it accepts your application.

Most credit card companies will perform a hard inquiry into your credit history when reviewing your application. Each hard inquiry will show on your credit report. If you have several of these checks performed in a short amount of time, it may lower your overall score.

Generally, the higher your credit score is, the more options you’ll have. Consumers with good or excellent scores can successfully apply for premium cards that offer higher credit limits and better benefits. People with subprime credit, on the other hand, may be denied even the most basic cards.

How do credit cards work?

Credit cards are a form of revolving or open-ended credit. Rather than receiving a fixed amount of money, you’ll receive a credit limit. You’ll be able to use as much or as little of this limit as you wish on a repeating basis if you pay off what you previously borrowed.

Let’s say you’re approved for a $5,000 credit card, and, over the course of a month, you spend $2,500. This will leave you with $2,500 in available credit, which means you can borrow the remaining $2,500 if you want. As soon as pay off your outstanding balance, your available credit will revert back to $5,000.

This basic principle applies to any credit card. Once you repay your full balance, you can borrow up to the full limit again and so on as you pay off your purchases.

With credit cards, you have flexibility in whether you wish to repay immediately or over time – the only restriction is that you must make your minimum payments for each periodic statement you receive by the required due date. If you do this, the remaining balance will carry over (or revolve) to the next statement.

wallet sitting on top of a credit card invoice

Most credit card companies give you a grace period to pay your balance before they add finance charges. During this time, which may last up to a full month, you won’t accrue interest on an outstanding balance. If you carry a balance month-to-month, you will pass the limits of your grace period and start accruing interest on your purchases.

Paying at least the minimum payments on time each month goes a long way to building positive payment history, which may help improve your credit score.

However, negative payment history will undo much of the hard work you’ve done to raise your score. You’ll likely see your score drop if you miss payments or pay less than the minimum balance regularly.

You may also notice your credit score declines if you end up using more of your available credit when you pay only the minimum payment. Credit utilization is something we went over in our post about credit scores and bad credit loans. But in a nutshell, it’s the ratio of how much credit you’ve used as compared to the total amount of approved credit you have at your disposal. A higher ratio has a greater impact on your score.

What is the APR for credit cards?

Standing for Annual Percentage Rate, it’s the yearly rate that a credit card company uses to calculate the interest charged on your periodic statements. This interest rate varies substantially depending on the kind of card you have and your credit score. If you ever forget what APR your card has, check your latest statement. It should display your APR clearly.

When do credit cards expire and why?

Quick — when does your credit card expire? If you frequently take advantage of online sales, you may have this (as well as your card number) memorized, as you’ll need to punch in the four-digit number embossed on the front of your card with every purchase.

pulling out a credit card from their wallet

The exact date of expiry depends on when you opened the account originally. Most cards expire after three years, although there are some exceptions.

Don’t worry if you’re nearing the expiration date soon. The ticking clock is just for the physical card you keep in your wallet — not your account — so you won’t have to reapply.

That will likely come as a relief to anyone who loathes filling out paperwork, but it may leave you scratching your head over why it has to expire at all. The reason isn’t just to complicate your life. An expiration date protects your card from:

  • Wear and tear: It’s easy to swipe your card to pay for things, but it can be harsh on the card itself. After a while, repeated use can damage the magnetic stripe and chip, making it impossible to read.
  • Fraud: In addition to your name and credit card number, your expiration date is another piece of data that validates your account. If you can’t submit an expiration date, your transaction will be declined online. This makes your account harder to hack.
  • Overuse: Although your credit card company will strongly encourage you to renew your expired card, it isn’t mandatory. At the time of your card’s expiration, you have the opportunity to re-evaluate your terms, and so does your credit card company.

What to do with old credit cards?

So what happens if your card will expire at the end of the month? It may not be valid for much longer, but that doesn’t mean it’s ready for the trash just yet. An expired card still displays important information that, although invalid, can be used by criminals to create fraudulent purchases and accounts under your name.

scissors used to cut up credit cards

To protect yourself from credit card fraud, it’s recommended you destroy your card before you throw it out. You can do this by cutting it up with scissors, taking care to:

  • Destroy the magnetic strip and security chip
  • Cut through the three-digit security code on the back
  • Chop up the card into enough pieces that the card number isn’t recognizable

How to dispose of metal credit cards is a little harder, as the average set of kitchen shears won’t be able to hack it. Luckily, most credit card companies that issue metal cards will provide a destruction service for their customers.

A quick recap about credit cards

So far, what we know about the average personal credit card is that it:

  • Is unsecured
  • Usually involves a hard inquiry into your credit
  • Is revolving
  • Will likely affect your credit score

Now let’s compare these four major points with the installment loan.

What is an installment loan?

An installment loan is a broad category of credit products that can be used for both personal and professional purchases. For today, we’re going to focus on personal installment loans — specifically those with short terms.

person holding up a loans sign

Like a credit card, small dollar personal installment loans are also typically unsecured. This means you won’t have to pledge any assets against your loan when you apply. Most lenders will look at your credit history as part of their approval process, using your credit score to gauge your creditworthiness.

How do installment loans work?

Unlike a credit card, an installment loan isn’t open-ended; it’s fixed.

Let’s say you’re approved for an installment loan of $2,600. That means that after you borrow the $2,600, you won’t have access to any additional credit unless you apply for another loan.

Most lenders will automatically transfer your approved amount to your checking account, giving you easy and quick access to the money you need. If you apply online, you’ll reap the same benefits of getting a payday loan online: a speedy response. In some cases, you may receive funds from an approved installment loan after one business day.

person looking at their credit card balance on their laptop

While a quick timeline is something these loans share, as you find more information on installment loans, you’ll know they’re more dissimilar than you may think. Perhaps the biggest difference is how you repay an installment loan. Although you’ll receive it in one lump sum, you won’t have to repay it in one lump sum.

Instead, if it’s a small dollar installment loan, you have the opportunity to pay off what you owe over several payments or installments. These payments usually coincide with multiple pay dates, making them easier to pay on time without jeopardizing other parts of your budget.

While you have until the length of your loan term to make all of your installment payments, it’s always a good idea to pay as much as you can — it just means that you may end up paying off your loan early. Here at MoneyKey, we encourage borrowers to make additional payments, as this may lower how much they pay overall in interest and fees.

How are payments for installment loans determined?

While most credit cards operate on a monthly billing cycle, an installment loan’s payment schedule may be unique to the borrower. Several factors typically come into play in determining when and how much you’ll have to pay for each installment of your loan depending on the lender, including:

  • State lending laws
  • Your income
  • Loan principal

The cost of the loan, which often includes interest expressed as an APR will factor into how much each installment payment will be. Generally, a small dollar installment loan has a higher APR than a credit card.

Now, one of the biggest questions is why someone would choose credit with a higher APR. That’s one of the trade-offs of getting a small dollar installment loan. While a credit card may have a lower APR, it may also have a higher rejection rate for people with low credit scores.

There are a lot of reasons why a credit card company will decline your application. Perhaps the biggest one is your credit score. Limited or low credit will reduce your chances of getting a credit card, and so will too many applications.

A low credit score may not have the same sway over your installment loan application. Some alternative lending options put less of a priority on your exact credit score. If you use an alternative lender as your source for installment loans, the lender likely estimates your ability to repay the money by looking at other aspects of your finances — like your income.

This is one of its greatest advantages of small dollar online installment loan lenders when compared to credit cards. While a low score may cause a credit card company to decline your application, a low score may not create the same roadblocks to this type of installment loan.

This is a boon to responsible people who, after some bad luck, are lugging around a bad credit history.

What’s the right choice?

At the end of the day, your decision relies on a lot of factors. What makes a credit card an excellent option for some people may make it a bad choice for someone else. The same can be said about installment loans.

People with subprime credit who have had trouble securing a credit card may opt for an installment loan when faced with an unexpected expense. Meanwhile, people who have prime credit who need regular access to credit may choose a credit card.

A personal line of credit loan can be a great option for someone who finds themselves somewhere in the middle. As a happy medium between credit cards and installment loans, a line of credit may help someone with a low credit score who needs access to open-ended credit.


If you aren’t sure where you fit on this scale, we recommend drawing up a list of pros and cons for each credit option. Go online to check out the kinds of credit cards available to a person with your financial profile, and learn more about MoneyKey installment loans and personal lines of credit. Once you have a good idea of what each type of credit product offers, start filling in your list.

In all likelihood, one will come out as the clear winner. Choose the one that works with your finances the best — this, in addition to paying your bills on time, will help you borrow responsibly the next time your mailbox is full of unexpected bills.

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