Credit card companies want to turn your unused line of credit into money you can borrow for things like home improvements or unexpected expenses. But accepting this loan offer may not be the best choice for your wallet or your credit score.
In recent months, two of the biggest credit card issuers, Citi and Chase, announced that they would offer credit card loans to eligible cardholders. Citi offers its Citi Flex Loan, while Chase plans to launch My Chase Loan in late 2019.
The new products appear to be aiming to take a slice of the booming personal loan market, which hit a record $143 billion in the first quarter of 2019, according to credit reporting agency TransUnion, an increase of 19 .2% year over year.
Credit card loans are fast, convenient and cheaper than cash advances. But personal finance experts say loans are still expensive and can lower your credit scores, making it harder to get credit with low interest rates in the future.
Before accepting this seemingly simple way to get money, think about the risks and compare your alternatives.
HOW A CREDIT CARD LOAN WORKS
Citi and Chase customers don’t have to apply for a loan, or even apply for one. Companies promote their “flexible financing offer” or new “lending function” via email, direct mail or on the account login pages.
“It’s very tempting because it’s so quick and easy, without an app,” says David Rae, a certified financial planner based in Los Angeles. “If you’re already in debt, it can snowball into a big problem.”
The amount you can borrow depends on the line of credit you have. Once you choose a loan amount and repayment term, the issuer transfers the money to your bank account within days. Citi will alternatively send a check.
The loans have repayment terms of one to five years and monthly repayments are added to your minimum card payment due. Citi and Chase say they report payments to credit bureaus as credit card payments, not as separate loan payments.
Having different types of credit on your reports can positively affect your scores. In this case, “there is no additional benefit to your credit score, beyond just having a credit card and making a payment”, Rae said.
You can continue to use your credit card, but you’ll want to track your balance and stay within the credit limit to avoid costly charges. You also won’t get cash back, miles, or points with the Citi or Chase loan.
COSTS AND RISKS
Rae advises that loans should only be considered for emergency expenses if you don’t have savings, rather than discretionary purchases.
“If you’re trying to book a vacation or shop for clothes, I wouldn’t recommend this product.” he says.
Credit card loans may cost less than cash advances, but they’re not cheap.
Citi Flex loans carry annual percentage rates ranging from 7.99% to 8.99%, while My Chase Loan offers range from 16.99% to 22.24% APR for borrowers with excellent ratings FICO credit score (over 720).
For example, a five-year, $5,000 Citi Flex loan at 8.99% APR would have monthly payments of $104 and total interest of $1,226.
Taking out a loan also increases your credit utilization rate, which is how much of your credit limit is used. Most financial experts recommend keeping your total utilization below 30%.
This loan can push you above that threshold and lower your credit score, says Bruce McClary, spokesperson for the National Foundation for Credit Counseling.
Whenever you borrow, compare the interest rates of multiple loan options and consider features that boost your credit or offer flexible payment schedules.
— Personal loans can offer lower rates, especially if you have excellent credit, and higher loan amounts. They also appear as separate accounts on your credit reports, helping to diversify your accounts and indicating that you can manage different types of credit, thereby increasing your scores.
– If you qualify, a 0% APR credit card is an interest-free loan, as long as you pay the balance before the end of the introductory offer period. Plus, you can earn cash back or travel rewards with this credit card.
“If you are able to get an interest-free credit card and pay it off on time, you will be much better off financially,” Rae said.
This article was provided to The Associated Press by personal finance website NerdWallet.