3 Lending Options to Look at Before Racking Up a Credit Card Balance

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  • A credit card isn't your only option for borrowing money.
  • Personal loans, home equity loans, and cash-out refinances could result in lower interest costs and less potential credit score damage.

Credit card interest can be costly. Here are some alternatives to seek out first.

When the need to borrow money arises, you may be inclined to reach for your credit cards. Charging expenses on a credit card is easy enough if you have a high credit limit. And that way, you won't have to go through the hassle of applying for a loan.

But there are a couple of definitive drawbacks to carrying a credit card balance. First, credit cards tend to charge a lot of interest, and paying one off over time could mean throwing a lot of your hard-earned money away. Secondly, too high a credit card balance could drive your credit utilization ratio into unfavorable territory. Once that happens, your credit score could take a big hit.

That's why it pays to seek out borrowing options outside of a credit card the next time you need money or the option to finance a purchase. Here are three lending choices to look at.

1. A personal loan

A personal loan lets you borrow money for any purpose. And you'll commonly pay less interest on one than what a credit card will charge you -- though the higher your credit score, the less interest you're likely to pay. Furthermore, if you keep up with your personal loan payments, they could actually help you build credit, as that positive activity will get recorded on your credit report.

2. A home equity loan or HELOC

If you own a home you have equity in, borrowing against it could mean paying less interest than what a credit card or even a personal loan will charge you. You can borrow against your home via a home equity loan or home equity line of credit (HELOC). With the former, you take out a lump sum loan and repay it in equal installments over time. With the latter, you get access to a line of credit you can draw from as needed within a specific time frame -- usually five to 10 years.

Now one big drawback of borrowing against your home equity is that your home itself will be used as collateral for your loan. Fall behind on payments, and you could put yourself at risk of foreclosure. But if you borrow carefully, you may find a home equity loan or HELOC is a great bet.

3. A cash-out refinance

A home equity loan or HELOC will let you borrow against your home equity without having to take out a whole new mortgage. A cash-out refinancewill require a new mortgage, but it may be your most affordable option yet from an interest rate perspective.

With a cash-out refinance, you borrow more than your remaining loan balance. You can use the extra cash you take out of your home for any purpose, as is the case with a personal loan.

That said, a cash-out refinance could result in higher mortgage payments, and falling behind on those could have the same dire consequences as not keeping up with your home equity loan or HELOC payments. You'll need to make sure you can afford your new mortgage payments before going this route.

While credit cards might seem like your best option for borrowing money or paying off a purchase over time, in reality, you may have several better choices to pursue. This especially holds true if you own a home and can use the equity you have in it to borrow affordably.

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