Credit Card vs. Fixed Interest Loan Payments

Both credit cards and fixed interest loan payments can be used to pay down debt, but there is a substantive difference between the two. With credit cards, the terms and agreements can change from time to time; fixed interest loan payments don't change during the life of the loan. In pursuing your financial goals, you can benefit by comparing the two to see which is the most cost-effective.

Interest Rate

If you have a credit card, your interest rate can change at any ,even if you have a fixed rate. The credit card company must notify you in writing 15 days prior to the rate increase. If your rate increases, your payments will increase and the amount of finance charges you pay will increase as well. Some changes to credit-card arrangements are scheduled to go into effect in February 2010: A credit card company will not be able to increase your fixed rate for a year unless you are delinquent.

Variable Rate

Credit cards can have variable rates. A credit card rate can increase if the index, such as the prime rate or the LIBOR, that it's tied to, also increases. Once the rate increases, your payments can increase along with the finance charges you pay. Normally, a rate increase for a credit card takes place 30 days after the index increases. If the index is lowered, the credit card rate will be lowered as well. A change in your credit card payment can keep you from budgeting effectively.

Promotional Rate

Credit cards also offer promotional or low-balance transfer rates. Sometimes, you can receive a zero rate for six months or a year. This allows you to pay off other high-interest-rate debt and save money by paying less finance charges. If you are late with a payment, your promotional rate will be canceled and you could receive a default rate that could be higher than 25 percent.

Fixed Rate

A fixed interest loan payment will have the same terms and agreements throughout the contract. When you make your payments, a portion will go toward the principal balance and a portion toward interest. The interest rate will not increase throughout the life of the loan. You can use a loan calculator to see how much of each payment is allocated toward principal and interest. When the last payment is made, the loan will be paid off.

Fixed Payment

If you have a fixed interest loan payment, you will be able to plan and budget, because you will always have the same payment. If you know how many months your loan is for, and the monthly payment, you can calculate the total amount of your loan. Multiply your payment times the number of months and you will get the total amount to be paid. If you pay more per month than your standard payment you will be able to pay off the loan faster. The extra payments will reduce your principal balance.