Credit card companies want to turn your unused credit line into cash that 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 largest credit card issuers, Citi and Chase, have announced they’ll offer credit card loans to eligible cardholders. Citi is offering its Citi Flex Loan, while Chase plans to launch My Chase Loan in late 2019.
The new products appear to be aimed at taking a share of the ballooning market for personal loans, 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 the loans are still costly and can lower your credit scores, making it more difficult to obtain credit with low interest rates in the future.
Before you accept this seemingly simple way to get cash, consider the risks and compare your alternatives.
HOW A CREDIT CARD LOAN WORKS
Citi and Chase customers don’t have to request a loan — or even apply. The companies are promoting their “flexible financing offering” or new “loan feature” via email, direct mail or on account log-in pages.
“It’s very tempting because it’s so fast and easy, with no application,” says David Rae, a certified financial planner based in Los Angeles. “If you’re already in debt, it can cause that debt to snowball and become a big problem.”
The amount you can borrow depends on how much credit line you have available. Once you choose a loan amount and repayment term, the issuer transfers the cash to your bank account within a couple of days. Citi will alternatively mail a check.
The loans have payback terms of one to five years, and monthly repayments are added to your card’s minimum payment due. Citi and Chase say they report payments to the 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’s no added benefit to your credit score, beyond just having a credit card and making a payment,” Rae says.
You can continue using your credit card, but you’ll want to track your balance and stay under the credit limit to avoid costly fees. You also won’t get cash back, miles or points with the Citi or Chase loan.
THE COSTS AND RISKS
Rae advises the 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 shopping for clothes, I wouldn’t recommend this product,” he says.
Credit card loans may cost less than cash advances, but they aren’t cheap.
Citi Flex Loans carry annual percentage rates that range from 7.99% to 8.99%, while My Chase Loan offers vary from 16.99% to 22.24% APR for borrowers with excellent FICO credit scores (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 the loan also increases your credit utilization rate — 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.
COMPARE ALTERNATIVES
Whenever you borrow, compare interest rates on multiple loan options and consider features that build your credit or offer flexible payment schedules.
— Personal loans may offer lower rates, especially if you have excellent credit, and higher loan amounts. They also show up as separate accounts on your credit reports, helping to diversify your accounts and indicate you can handle different types of credit, ultimately lifting your score s.
— If you qualify, a 0% APR credit card is an interest-free loan, as long as you pay the balance before the introductory offer period ends. Also, you may earn cash back or travel rewards with this credit card.
“If you’re able to get a credit card with no interest, and you pay it off within the time frame, you’re going to be way better off financially,” Rae says.