3 loan options to consider before building up a credit card balance
3 loan options to consider before building up a credit card balance
A couple meets with a banker to discuss their finances.

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Interest on credit cards can be expensive. Here are some alternatives to research first.

Key points

  • A credit card isn’t your only option for borrowing money.
  • Personal loans, home equity loans, and cash refinances could result in lower interest charges and less potential damage to credit rating.

When the need to borrow money arises, you may be inclined to use your credit cards. It’s fairly easy to charge expenses to a credit card if you have a high credit limit. And this way, you won’t have to go through the hassle of applying for a loan.

But there are some definite downsides to having a credit card balance. First, credit cards tend to charge a lot of interest, and paying off one over time could mean losing a lot of your hard-earned money. Second, too high a credit card balance could push your credit utilization rate into unfavorable territory. Once that happens, your credit score could take a hit.

That’s why it’s worth looking into borrowing options outside of a credit card the next time you need cash or the ability to finance a purchase. Here are three loan choices to consider.

1. A personal loan

A personal loan allows you to borrow money for any purpose. And you’ll generally pay less interest than a credit card will charge you – although the higher your credit score, the less interest you’ll pay. Plus, if you keep paying off your personal loans, they might actually help you build your credit, because that positive activity will be recorded on your credit report.

2. A home equity loan or HELOC

If you own a home that you have equity in, borrowing against it could mean paying less interest than a credit card or even a personal loan will charge you. You can borrow against your home through a home equity loan or a home equity line of credit (HELOC). With the former, you take out a lump sum loan and repay it in equal installments over time. With the latter, you have access to a line of credit on which you can draw if necessary within a specific period, generally five to ten years.

Now, a big downside to borrowing against your home equity is that your home itself will be used as collateral for your loan. Fall behind on your payments and you could put yourself at risk of foreclosure. But if you borrow carefully, you might find that a home equity loan or HELOC is a great bet.

3. Cash refinance

A home equity loan or HELOC will allow you to borrow against the equity in your home without having to take out a whole new mortgage. cash refinancing will need a new mortgage, but this may be your most affordable option from an interest rate perspective.

With a cash refinance, you borrow more than the remaining balance of your loan. You can use the extra money you take out of your home for any purpose, just like a personal loan.

That said, a cash-out refinance could result in higher mortgage payments, and falling behind on those could have the same disastrous consequences as not keeping up with your home loan or HELOC payments. You’ll need to make sure you can afford your new mortgage payments before you go down this route.

Although credit cards may seem like your best bet for borrowing money or paying off a purchase over time, in reality, you may have several better choices to pursue. This is especially true if you own a home and can use the equity you have to borrow affordably.

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