As finances are becoming more difficult to acquire, families in Canada are looking for more ways to borrow money. Two of the more common ways of borrowing funds are applying for credit accounts and requesting payday advances. Both of these financial services provide a way for a person to juggle household bills. Furthermore, there is a huge difference between the two. Deciding which method of loan is more effective depends on the individual’s circumstances. To decide between the two, one must understand the difference between them.
The following is a comparison of credit cards and payday loans:-
A credit card is a plastic card that is connected to a distinct line of accounts. The card gives the customer access to a certain threshold of funds approved by a lending institution. Whenever the debtor desires to borrow funds, he or she may use this card. After the customer makes a purchase or withdraws funds, that amount is deducted from the credit account. For example, if the bank approves a $250 credit line and the customer spends $50, the remaining credit line will be $200. Once the consumer repays the amount that was borrowed, that amount goes back into the credit account. This type of lending system is referred to as a revolving credit line. Lenders approve new credit cards based on the applicant’s credit score and income. Credit cards can have a value of $100 to several thousand dollars.
A payday advance is an instant cash loan that a lending institution approves on the same day in most cases. The lenders do not base instant cash loans on the consumer’s credit score. They decide on approval based on the individual’s income level and time at his or her employer. The name “payday loan” comes from the repayment status of the loan. Payday lenders expect their customers to return the funds within fourteen days of the agreement. They are short-term loans that work best for the individual in times of emergency.
Should I Pay My Credit Card or Payday Loan First?
One of the most significant differences in payday loans vs credit cards is the annual percentage rates. Credit cards usually have annual percentage rates of around 17%. The annual percentage rate of a payday loan can be as high as 1940.5%. The customer has to pay the price for the ability to access funds immediately.
If a customer makes timely payments on his or her credit card account, that person can boost his or her credit score. The longer the account is open and the consumer pays on time, the better his or her score will become. Payday loans do not affect one’s credit score unless the consumer does not make a payment. There is no credit boost available for timely payments. The only benefit the customer will get from paying a payday loan is the opportunity to borrow again.