@Anonymous wrote:I'm trying to finance fire safety clearing on my property. My family has experienced financial hardship and our credit has suffered as a result. I'm trying hard to build my credit back up but this clearing needs to be done for safety. We were unable to qualify for a personal loan at a low rate ... the best we can do is 19%. On the other hand, I did qualify for a loan from an existing credit card with a fixed rate of 10%, however, it will show up on my credit report as credit card debt, not as a loan. Which one looks better on my credit report, the credit card loan at the lower rate or the personal loan at the higher rate? Obviously it makes more financial sense to take the credit card loan with the lower interest rate, but I don't want my credit score to suffer as a result of all this.
Welcome to My Fico Forums and congratulations on your first post!
You've asked a complicated question.
There seem to be really two parts - financing the property improvement and then also how the debt affects your credit.
As you said, the logical answer to the financing part would be to choose the lower interest charges, but it could depend on some other factors as well.
Some key questions:
How much is the safety clearing going to cost and are you able to pay any out of pocket?
How much can you afford to pay monthly? The last thing you want to do with either form of loan is to overextend your ability to pay easily, which could lead to late payments or default. I would guess that the personal loan, even with the higher interest, has longer term and lower monthly payments? If so, this could actually make it more attractive, especially if the loan has "simple interest" on the balance calculated monthly which allows you to pay it off early without penalty. This way, you could pay extra as you were able to pay it off more quickly.
Which form of loan "looks better"?? For one, they both will look good when they are paid off! And neither really will help your credit score while you are in debt. A personal loan is less risky to a lender manually reviewing your file because normally, he knows you can't go out and charge more against a loan if it's not an open-line-of-credit like a HELOC or PLOC. A revolving line of credit can be more risky because nothing is to stop you from running up all your open lines of credit on credit cards.
On the credit card you're planning to use, how much is the credit limit and how much would you be charging on it? That number as a percentage of your available credit is your "utilization" on that card. For example, let's say I have three cards with $1K limit on each. If I charge $990 on card 1 and none on cards 2 and 3, my utilization on card 1 is 99% (990/1000). My overall utilization is 33% (990/3000.) Both numbers affect your credit score. High utilization on either one card or across all your available credit lines is less desirable. So if you only have one card and plan to charge it up almost fully, that will seriously affect your credit score until it is paid down. This is where a personal loan could really be more favorable, since it won't show such a high utilization rate on open credit lines.
Finally, I would suggest that if you were to put the debt on a credit card at 10%, realize that only making the "minimum payments" will probably have you going quickly into more debt. You would need a plan to pay it off much more quickly. And whatever amount you put on the card probably needs to allow some padding below the credit limit for possible interest charge accrual if you don't pay quickly enough. (Many cards may charge a fee if your balance exceeds the credit limit. This practice was limited by the 2009 CARD act but some over limit charges may still be allowable. Read your card terms and conditions or talk with a customer service representative for clarification about how this might apply.)
All of the above will help us to give you better advice.
@Anonymous wrote:The credit card loan actually has a long term and the payment would be lower than the personal loan, which has the same term and higher interest rate. But we're looking at $115 a month (I think) vs something like $160 a month so it's not a huge difference. Even so, the way things are now we have to save every penny we can.
The credit limit on the card is $20K and I only have a couple of hundred dollars on it at the moment, so it would be roughly 25% utilization on that card.
The credit card markets the loan as a "flex-loan" and it is set up like a loan, with a fixed interest rate and fixed payment. If you pay the fixed payment every month you will have the whole thing paid off at the end of the loan term, which I believe is five years. It's technically credit card debt, but it's managed like a loan.
Well it sounds like in this case, the card might be the better choice.
Best wishes on proceeding forward and with the property clearing!