Six Major Differences Between Payday Loans and Credit Cards

Updated: 12 August 2020

Original Post: 1 May 2018

Payday loans and credit cards are two of the biggest sources of credit available to people in the U.S. In a lot of ways, they’re very similar - but the differences are important. We're going to expand on some critical differences that make credit cards a significantly better choice than a payday loan.

The similarity: Payday loans and credit cards are both short-term loans

Both a payday loan and a credit card are designed for short-term immediate expenses. They give you a small extra amount of money that you can use when you want it, how you want it. They both charge interest on the amount of money you use, and both of them require repayment over a short time period, ranging from a few weeks to a few months. This is where the similarities end.

The differences:

  1. Payday Loans are cash, credit cards are a credit line

    A payday advance for $300 will put $300 of cash in your pocket. On the other hand, a credit card gives you the option to spend up to $300 but doesn't immediately add money to your bank account. The important distinction here is that certain bills like rent, utility, cable, and cell phone sometimes can't be paid with credit cards.

  2. Payday loans give you the entire amount at once, and charge you for it!

    A payday advance for $300 gives you all $300 immediately. Even if you don’t use any of the money, you will be charged interest on all $300. On the other hand, a credit card has a credit limit that only charges interest on what you use. They key concept here is use of funds. A payday loan makes all of the funds available for your use on day 0, so they charge you interest on the entire amount starting day 0. With a credit card, you're only using funds when you make a purchase on the card, so the interest counter starts the moment you swipe your credit card and only for the amount charged. If you never use your card, you'll never pay interest on the credit line!

  3. Credit cards have a free interest grace period!

    As we noted above, the payday loan interest counter starts immediately and with credit cards you only pay interest on what you use. An additional bonus with credit cards is what we will call the recent activity grace period or credit card float. This is a beautiful period of zero interest that exists from the day you swipe your card until your next credit card statement. If you pay off the amount of your purchase when you get your next statement, you will pay 0 interest on that purchase! This period can be as long as 30 days if your purchase happens right after your last statement. Being strategic about timing your purchases can help you manage your cash and minimize the interest costs on your credit card!

  4. Payday loans (and installment loans) are more expensive than credit cards/i>

    The average credit card in the US charges about 18% interest, but most entry-level credit cards charge around 22%. The average payday loan, on the other hand, charges over 400% interest! Traditional payday loans are much more expensive than credit cards. That’s why if you have a payday loan and a credit card, you should always pay off the payday loan first. Installment loans are no exception, even Fig Loans. In almost all cases, your credit rate is going to be lower and you should prioritize paying off higher interest loans to save yourself on interest costs!

  5. Payday loans don’t have flexible payment schedules and amounts, but credit cards do

    When you take out a debt from a credit card, you can pay off the balance any time and in any number of payments. There is a monthly statement and you’re required to pay a minimum amount at least once a month, but that's about it. A credit allows you to be flexible in paying off principal and interest at your own pace, allowing you to choose how much and when to pay. Meanwhile with traditional payday loans, you to pay a specific amount on a set date. Traditional payday lenders make changing payments a hassle and often charge fees for changes. It's a nickel and dime strategy to help them make money and exactly the thing we don't like about airlines today.

  6. You can get a traditional payday loan without a credit check, but credit cards require a credit score

    Credit cards are cheaper, offer a more flexible source of credit, and are more forgiving to pay off. What’s not to like? Why doesn’t everybody have a credit card? You’d be surprised at how many people don’t realize it, but having a credit card requires a good credit history. Even introductory cards that can only offer you a low credit limit will not be available to someone who has a credit score under 600 or very little credit history.

Fig combines the flexibility of credit cards with the availability of payday lending

Payday loans and credit cards are two ends of the spectrum and we recognize that not everyone can meet the requirements for a credit card. Fig was created to help people with low credit scores get emergency cash and rebuild their credit through our Fig installment loans. Our loans have the lowest cost in the market and most flexible repayment terms. We know that financial emergencies and unexpected events happen, and are able to delay and break up payments to help fit our loan to your budget.

If you are considering a payday loan, we urge you to first consider an installment loan (Fig or otherwise!), or these alternatives. We hope this post has cleared up the differences between payday loans and credit cards and shows why credit cards are a better option. If you have more questions about the different types of loans available, or you want to know more about how installment loans can help your credit, give us a shout at service@figloans.com, Facebook, Instagram, and Twitter.