Credit card providers want to line into cash that you can repay for items like home repair or unforeseen expenses. Taking this loan deal maybe not the right option for you or your credit score.
In recent months, Citi and Chase revealed that they are providing credit card loans to qualifying cardholders. Citi is selling Citi Flex Loan, while Chase is preparing to launch My Chase Loan by the end of 2019.
According to credit monitoring firm TransUnion, the latest offerings targeted at capturing a share of the demand for personal loans. Which surpassed a record $143 billion in the first quarter of 2019, a rise of 19.2% year-on-year.
Credit card loans are fast, easy and cheaper than cash advances. Personal finance experts said that loans are still expensive and will lower credit ratings, making it difficult to secure low interest rate loans in the future.
Before you embrace this seemingly easy way to get cash, weigh the risks and compare the alternatives.
How does a credit card loan work
Customers of Citi and Chase don’t have to ask or even apply for a loan. Companies are marketing their “flexible financing offer” or new “loan feature” through email, direct mail or on account log-in pages.
“It’s very tempting because it’s so quick and easy, with no application,” says David Rae, a Los Angeles-based certified financial planner. “If you’re already in debt, it can make you a snowball debt and become a big problem.”
The amount you could earn depends on how much of the credit line you have available. If you selected the loan amount and the maturity period, the issuer can move the cash to bank account within a few days. Alternatively, Citi will give a check.
Loans have a payback period of one to five years, and annual repayments are added to the minimum balance owed on the card. Citi and Chase disclose fees to credit bureaus as credit card payments, not as independent loans.
Having various types of credit on your databases will have a massive influence on your ratings. In this scenario, “there is no added benefit to your credit score, beyond just having a credit card and making a payment,” says Rae.
You can continue using your credit card, however you’ll want to keep track of your balance and remain under the credit cap to prevent costly charges. You’re not going to get cash back, miles or points with a loan from Citi or Chase.
Costs and risks
Rae recommends that loans can only be used for immediate costs if you have no savings, rather than disposable expenditures.
“If you’re trying to book a vacation or go shopping for clothes, I wouldn’t recommend this product,” he says.
Credit card loans can cost less than cash advances, but they’re not cheap.
Citi Flex Loans have annual percentage rates ranging from 7.99 per cent to 8.99 per cent, while My Chase Loan deals from 16.99 per cent to 22.24 per cent APR to borrowers with excellent FICO credit ratings (over 720).
For example – a five-year, Citi Flex Loan of 8.99 per cent of APR will have monthly payments of $104 and gross interest of $1,226.
Taking the loan would also increase the credit usage rate—how most of your credit limit is used. Many financial experts suggest keeping the average consumption below 30%.
This loan will drive you over the level and lower your credit score, says Bruce McClary, spokeswoman for the National Credit Counseling Foundation.
Compare to the alternative choice
When you borrow, match interest rates on various loan options and seek features that build up your credit or offer adjustable payment schedules.
- Personal loans can provide lower rates, particularly if you have excellent loans and higher sums of loans. They will also function as individual accounts on your credit records, help diversify your accounts, and show that you can manage different forms of credit, effectively raising your ratings.
- If you apply, a 0% APR credit card is an interest-free loan, as long as you pay the balance before the expiration of the introductory offer period. You can also receive cash back or travel benefits with this credit card.
“If you’re in a position to get a credit card with no interest, and you pay it off within the timeframe, you’re going to be much better off financially,” Rae says.
Source: Nerd Wallet
