When a credit card is better than a loan

A credit card is a great short term solution for tackling your debts. We point out just how much it can save you, as well as when a loan is better.

A friend recently asked me whether a loan would be better than a credit card for tackling her debts.

A seasoned credit card tart, she'd been shifting her balance between her flexible friends for years, and was looking for a more permanent solution to banish them for good.

I told her that on the one hand, credit cards are an excellent tool for short-term borrowing. If you bag the right balance transfer, you can benefit from over a year of interest-free borrowing.

But with all credit cards charging a balance transfer fee of up to 3%, transferring your debts is becoming more expensive. So, if you're tired of borrowing on cards, or want to consolidate several existing debts, the other way to tackle debt is to opt for a loan.

Loans are ideal for when you want to borrow larger amounts, or simply if you'd prefer to fix your monthly payments.

The cost test

But which option is cheaper? Here are some scenarios:

Here are the top three loans on offer if you want to borrow £5,000, and how much you'll have to pay back:

And this is how they compare to £5,000 borrowed on the market leading Virgin Money MasterCard, which currently has a 0% balance transfer deal for 16 months, and an interest rate of 16.6% charged after this period ends:

As you can see, if you have £5,000 of debt, in most cases using the balance transfer card instead of a loan over three years is the cheaper option.

Bear in mind that the interest payments accelerate rapidly as your payments drop. In fact, the difference between paying £100 a month and £200 a month in this case equates to over £1,000 in extra interest payments.

So if you are going to go down the credit card route, the sooner you can pay the debt off the better. If not, be sure to shift the balance onto another credit card - or the interest payments will quickly catch up with you.

If the idea of a structured payment system still wins over cost, supermarket Sainsbury's is still topping the loan tables, and if you own a Nectar card, you can get the special rate of 7.9%.

Alternatively, non Nectar card holders can still get a rate of 8.1%.

Second-placed Tesco also offers a rate of 7.9%, though you have to be an existing Tesco customer to apply. If you don't already bank with Tesco, you can still get a loan, but you'll have to pay a slightly higher rate of 8%.

When a loan wins the day

So that's the deal on £5,000, but what if your debts are slightly larger? Here are the top three deals if you want to borrow £10,000:

...and how they compare to borrowing £10,000 on the Virgin credit card

As you can see, the tables are somewhat turned when you compare rates on £10,000, and unless you can afford large monthly payments, you could end up forking out an extra £5,000 in interest with the Virgin card.

You also have to bear in mind that finding a credit card with such a big limit is a tall order, and means you'll have to have an excellent credit record to apply. Play with our own loan and credit card calculators to find which solution is best for you.

Rate for life

A halfway house between these two options is a lifetime balance transfer card.

Unlike a standard balance transfer card, in many cases you won't have to pay a transfer fee, and although you won't benefit from an interest-free period, you won't be hit with any shock interest payments either.

Here's what the payments on the market leading Barclaycard Simplicity credit card with a flat rate of 6.8% would look like on a £5,000 transfer:

...and on a £10,000 transfer:

In these two cases the Simplicity credit card is right up there with the other options in terms of competitiveness, and could prove useful if you don't want to keep applying for credit cards.

However, you have to have an impeccable credit record in order to get the Simplicity card, so bear this in mind before you apply.

Whatever payment plan you choose, remember that the sooner you pay your debt off, the less interest you'll pay. So set up a plan and stick to it, and whether it's a loan or credit card you choose, you'll be taking you first steps towards financial freedom.

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