Should You Use a Credit Card Loan?

Kim Porter
·8 min read

If you need money for an upcoming expense or are struggling to make ends meet because of the coronavirus, your credit card may offer a hybrid type of loan that could help. A credit card loan requires neither a credit check nor an application, removing some of the traditional barriers to loans, and allows you to pay in installments.

But before you choose a credit card loan, first weigh the pros and cons.

What Is a Credit Card Loan?

Credit card loans, including the Citi Flex Loan and My Chase Loan, allow you to borrow money against your credit limit, but they aren't cash advances. They act more like personal loans.

Once approved, you'll get a cash deposit directly in your bank account, which you'll repay in installments over a set number of months at a lower interest rate.

The amount you can borrow depends on your credit card limit. Once you choose a loan amount and repayment term with a monthly payment, the issuer transfers the funds to your bank account within a couple of days.

The loan term may vary from six months to five years, and monthly repayments are added to your card's minimum payment due. Annual percentage rates on these loans are fixed and typically lower than what you'd get on your normal credit card purchases or a cash advance.

Because credit card loans take up a portion of your credit line, they differ from personal loans, which are considered installment loans. Credit card loans also differ from cash advances, which typically have low dollar limits, high APRs and multiple fees.

[Read: Best Personal Loans.]

What Is a Credit Card Payment Plan?

Citi's Flex Pay and American Express' Pay It Plan It are payment plans that allow cardholders to repay a purchase in installments. Depending on the issuer, the payment may come with a fixed interest rate or a fixed monthly fee.

With payment plans, instead of getting a lump sum of cash in your bank account, you select a recent purchase and choose a plan to pay it off over time. Your payment will be added to your credit card's minimum payment due each month. Any purchases you put on a payment plan count toward your credit limit.

When Should You Use A Credit Card Loan or Payment Plan?

You might consider using a credit card loan or payment plan if:

You qualify for the loan or payment plan. Not everyone qualifies for the Citi or Chase loan options because they're targeted offers. That means only cardholders who receive an invitation via email, direct mail or online login can request a loan.

The amount you can borrow or put on a payment plan depends on how much of your credit line is available.

While Pay It Plan It is available on many American Express personal credit cards, only qualifying purchases above $100 are eligible. AmEx also takes your creditworthiness and credit limit into account before allowing you to set up a payment plan.

There's an emergency and you lack savings. Accessing cash through a hybrid loan can be a lifeline for someone in a financial crisis.

"Maybe they're staring down the barrel of food insecurity, or they're in a situation where they know they'll face eviction soon," says Eric Espinoza, director of research and advocacy at Neighborhood Trust Financial Partners, a nonprofit financial coaching service. "It gives a level of flexibility to buffer yourself from a financial emergency in a way that credit cards are more limited."

You prefer a streamlined loan and payment process. Hybrid loans and payment plans remove some steps associated with traditional borrowing; for example, they don't require an application or credit check.

With credit card loans, you request the funds and receive the money within a few days. Payment plans allow you to log into your account, select a purchase and set up a plan. The monthly payment rolls into your credit card's minimum payment, which can simplify paying your bills.

You want a predictable payment and fee structure. Before taking out a credit card loan or using a payment plan, you'll be able to see whether the monthly payment fits your budget. A credit card minimum payment, on the other hand, can vary based on your balance and how much interest has compounded.

"It's a huge advantage to be able to understand those terms upfront in a way that you wouldn't with a credit card," says Katie Bossler, financial expert at GreenPath Financial Wellness, a nonprofit financial counseling agency.

You won't pay application fees or prepayment penalties, although account fees, such as late payment fees, may still apply.

You don't qualify for cheaper credit. Some banks are tightening eligibility standards on some lending products, including home equity loans and personal loans. If you need to borrow money and can't qualify elsewhere, these options may help you access credit with affordable loan terms.

[Read: Best 0% APR Credit Cards.]

Drawbacks to Credit Card Loans and Payment Plans

These financing options may have perks, but they're not perfect. Here are some drawbacks to keep in mind.

They increase your credit utilization. The money you borrow is considered part of your credit card limit, so when you take out a hybrid loan or use a payment plan, your credit utilization climbs. Most financial experts recommend keeping your total revolving credit utilization below 30%.

These options can push you above that threshold, which may damage your credit scores. Before borrowing, try using a free credit score app to help you predict the potential impact on your credit.

You might pay more in interest. Many cardholders know credit card interest can be costly, so "people have generally gotten into more productive habits with paying off their credit cards," Espinoza says. "But they haven't developed that same mentality surrounding installment payments. I think (credit card loans) could have an effect to where it lulls people to sleep a little bit on the monthly payment."

Ask yourself whether you're likely to pay off debt early or over a longer time frame. Based on your budget, calculate the interest in a few scenarios.

For example, a $5,000 credit card loan with a 7.99% APR and 12-month term would come with a monthly payment of about $434. You'd end up paying about $219 in interest. But charging $5,000 to your credit card with a 16% APR and paying it down over a year would cost about $444 in interest.

Loan payments may be higher than your minimum payment. A credit card minimum payment is typically 1% to 3% of your balance plus any interest you've accrued. It may be lower than the monthly payment on a credit card loan or payment plan.

"If, for some reason, you experience some sort of financial turbulence, you might have a harder time keeping up with those payments and keeping the account current," Espinoza says.

There's no added credit benefit. Having different types of credit can positively influence your credit scores. Citi and Chase say they report credit card loans to the credit bureaus as part of your credit card limit and not as a separate loan, however.

"That means the credit card loan keeps you in the world of revolving debt," Bossler says, and there's no added credit benefit to using a credit card loan.

You won't earn rewards. Cardholders typically won't earn points, miles or cash back on a credit card loan. This leaves less room on your line of credit to earn rewards.

[Read: Best Rewards Credit Cards.]

Alternatives to Credit Card Loans and Payment Plans

If hybrid loans and payment plans aren't right for you, consider your alternatives.

Look for personal loans. These may offer higher loan amounts and lower interest rates compared with a credit card loan, especially if you have excellent credit.

Apply for a low-interest credit card. Some credit cards offer a 0% APR on purchases or balance transfers for a certain time frame, typically 12 to 18 months. If you pay down the balance before the introductory offer ends, you pay no interest. You may even earn rewards on your purchases, unlike with a credit card loan.

Save money for the purchase instead. If you can hold off on the purchase, try saving for it instead of going into debt.

Bossler suggests figuring out how much a monthly payment would be on a loan. Putting away cash can help you determine if you can afford a monthly payment in the first place.

"If you don't have that money in savings after a few months, you'll know that it won't really work with your lifestyle," she says.

Bank with a credit union. These financial institutions typically offer lower interest rates on products like credit cards and personal loans. Plus, customers generally report getting better customer service.

"It has an entirely different feel compared to walking into a Citibank, for example, and being just another applicant," Espinoza says.

He recommends establishing a relationship with a local credit union when you don't need to borrow. Then, "when the need arises, you may be able to borrow from them at a reasonable rate," he says.