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Stand-Off: Credit Cards vs. Loans

In the battle between payday loans and credit cards, it might seem there can be only one winner – if you are looking just at the effective rate of interest you are being asked to pay. Like many things in life, however, the comparison might prove to be far less straight forward.

Where Do You Stand on the Credit Cards vs. Loans Debate?


When making the comparison between payday loans and credit cards the leading detractors (Money Saving Expert, for example) immediately point to the very high rate of interest – APR or annual percentage rate – you pay on the former, compared to the latter. Interest rates on credit card purchases and cash advances, for example, may range between around 20% and 35% APR, whilst most pay day loans attract rates of interest at least a hundred times greater.

The more reputable payday loan lenders, such as Wonga.com, however, make no secret of the high APR on their borrowing – Wonga representative APR, for example, is some 5,853%. Though alarming this figure may seem, it is nevertheless worth remembering that payday loans or cash advances are typically for a very short period of time – generally from as short as one day, to as long as just 30 days or one month. Paradoxically, therefore, the shorter the repayment term – and hence the cost to the borrower – the higher the APR appears.


The repayment term represents a very significant difference between a payday loan and credit card cash advance.

As mentioned, the payday loan is repayable in full in the very short term; the cash advance on a credit card, however, may be repaid over an almost indefinite period of time – and the longer the repayment term, of course, the greater the amount of interest that needs to be paid.

As a reference on wiki tells us; credit cards “may simply serve as a form of revolving credit” – borrowing in one month may simply be rolled over into the following month when still more credit may be notched up. Repayment may then be spread over very many years.

What a very good thing, you may say – my credit card offers a source of more or less permanent credit …

… and that may be precisely why so many credit cardholders eventually find themselves in serious financial difficulties – simply through the ready access to any number of cash advances as and when they are wanted.

The payday cash advance, however, has a definite beginning and a definite end – the loan is repayable in full on the expiry of the agreed borrowing term. The exact cost of the loan, accrued interest and any set-up fee is known by the borrower from the very outset.


These days, of course, the availability of credit to any individual is generally more tightly controlled than in the past – responsible lenders want to lend only to those who are likely to repay the loan as and when it becomes due.

By taking a look at a representative credit card issuer such as American Express, for example, it becomes clear that only those with no history of bad debt need apply.

Reputable payday loan lenders are equally responsible, with strict codes of practice on the assessment of borrowers’ creditworthiness. But if you have a less than perfect credit history, you may be more likely to get a payday cash advance than be issued with a credit card – simply because the former is for a fixed repayment term, whereas the latter may be a route to permanently revolving credit.

microphone-img Your Turn! When it comes to the credit cards vs. loans showdown, where do you stand and why?

About Ronnie E.

Ronnie is the frugal Latina of the group. Hailing from the beautiful Andes Mountains in Bolivia, she lives and breathes frugality. She loves to figure out how to spend less money and takes on the challenge of finding great deals and cheaper options every day.

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  • Jenny @ MyLittleMe

    Oh, that’s a hard one. We really stay away from credit cards. We both overdid it with those when younger. Think the safest would be to do neither, but if something needs done, then one loan for all other debts.

    • Jessica J.

      Thanks for weighing in! Not all debt is necessarily bad, but it’s really important to have a plan and not “overdo” it as you said.

  • CouponDivaAndi

    Whoa Whoa Whoa! Wrong wrong wrong! Neither credit cards NOR loans are good for ANYBODY (from somebody who’s 14 years debt-free) – that’s MY story – and i’m sticking to it…. 😀

  • Jessica Ann Jones

    My husband and I have a credit card we use for emergencies — well, we DID until he lost his wallet (thankfully someone returned it at Camp Pendleton with everything still in it!) but we had to cancel the card before we got his wallet back. So we are still paying on it, but we can’t make any more payments with it because they won’t issue another one until it’s paid off. I have my own CC with Victoria’s Secret because I absolutely love the place and I shop there ALL THE TIME, so it only makes sense to use their card and get special rewards and coupons. I guess my point is I prefer my CC.

  • Elisebet F

    Interesting! I’ve never thought about a payday loan being a better option than a credit card, but if you think about it as a very short term solution, I see how the payday could be better. When it comes to a showdown… I don’t like using credit in general (paying cash for everything is best), but I know it’s necessary to have at least a credit card, so you can qualify for a mortgage, etc. So out of the two…I’d probably say credit card, so at least you have a credit history. Unless payday loans can affect your credit history positively? I don’t know.

    • Jessica J.

      Elisabet, good question. I know your credit score will improve if you pay bills and debts on time, but this is a good point to research.

  • homelifeabroad

    I think a payday loan is an okay option as long as you desperately need fast money and you know you can pay back on time.. those interest rates are nasty and it’s not worth the extra costs. Otherwise, I prefer a credit card all the way. Mine has a limit as to how much I can spend so I know I can’t go overboard.

  • Sarh Snarski

    I never want a credit card! A payday loan would be so much better! It is something you’d apply for when you REALLY need it verses a credit card, which you always have and can simply swipe and go, you rack up too much debt too quickly. I have enough debt in student loans.

  • Jayne Townsley

    I’ve seen people get into very bad situations with payday loans, so I’d stick with a credit card.

  • Athena Nagel

    I would have to say anything except a credit card!

  • It’s hard to say because we only have a secured credit card through our bank, and an interest free credit card through the military, so because of that I’d never consider a payday loan a better option. If we had to choose between that and credit cards with interest rates, though, I’m not sure. We pay off the credit card each month regardless, so I think that would still be a better option for us.