Credit cards are known as one of the most expensive ways to borrow money. This is not the whole story, but it is a good idea to understand why credit cards charge what seem to be large amounts of money in order to get lower interest in the future.
There are a number of reasons why credit cards charge more than other forms of consumer credit. These include the fact that the loans are unsecured, the loans are flexible and that in many case that the charges are relatively small. The fact that a credit card is so flexible is another reason why credit cards charge high interest rates.
Securing a loan means pledging a piece of property, usually but not always a house, to the loan provider. If the loan defaults then the loan provider will have the ability to take the property back. This has two effects; firstly it means that the borrower will prioritise this loan above other loans as well as above a good amount of personal spending. It will also mean that the lender is less likely to lose the amount if the loan does default because they will be able to sell the house and so recover most or all of the money advanced. This means that these loans are far cheaper than other loans as the risk of default – a very high cost with credit cards – is minimised.
This can be seen with the offers that are available to people with a good credit score. They will tend to be offered long term low interest rate credit cards. This is not primarily because of the rewards programs or free insurance going missing, but it is mainly because these cards are largely restricted to those people with a good credit rating, which cuts down the possibility of default.
The administration of credit card borrowing can also be another cost that means that credit cards are more expensive than other forms of borrowing. As credit card amounts change on an almost daily basis and are not entirely predictable then the administrative cost of these loans is likely to go up dramatically.
The flexibility and convenience of credit cards is another reason why credit cards are so expensive. As a loan has to be applied for before it can be used and a credit card is able to be used immediately it means that customers are much less likely to look at the interest rate before borrowing with a credit card.
