by Joseph Kenny | 05/25/09

People trying to rebuild their credit often have to resort to unorthodox means in order to obtain loans and other means to their ultimate end. One option we're seeing exercised more and more often among those attempting to rebuild their credit is the so-called "credit card loan".

This, effectively, is opening a credit card account not as an emergency fallback, but with the intent to use most or all of the full limit of the card as a one time loan, which can then be paid back a bit at a time on a month to month basis.

Imagine you're buying a car. You really have three options: pay cash, try to obtain financing from a lender such as a bank, or open a credit card account. Assuming that the first option is out, you have to face the difficult task of acquiring a loan. These are desperate times and its already hard for even those people with prime credit ratings to obtain loans for non-appreciating investments such as automobiles. Imagine the difficulty someone with ailing credit would face. It is, however, much easier to obtain credit cards now than it has been in the recent past, and you can easily consider this to be a valid alternative. After all, what is the difference between a loan of $3000 and a credit card with a $3000 limit?

Well... what *IS* the difference? It could be minor, or it could be quite significant, and this is the criteria you should use for determining whether or not to resort to using a credit card as a loan. First and foremost, you should look at the interest rate attached to the credit card, versus what interest rate you might expect to get with a similar loan. If the credit card's rate is substantially higher, as it might well be, then it would probably be more in your best interest to use a standard loan.

One thing to consider also, is the minimum monthly payment on the credit card, versus the minimum monthly payment on the loan. Generally speaking, you'll have a lot more flexibility with a credit card, and the option to pay only a minimal amount on the balance during a given month should you find yourself facing hardships. This can be something of a double-edged sword, however, as you could easily find yourself in a rut, paying just the minimum month after month, only to see your overall balance growing rather than shrinking. Who wants to face that? Therefore, if you do end up using a credit card as a loan, be sure to treat it as if it were a regular loan, as often as possible.

All in all, the credit card as loan situation has its pros and cons as do most options available to those with diminished credit. If you apply common sense and proper financial protocol to these cards, however, they are functionally no different from standard loans and you should have nothing to fear. As with most matters of finance, success is dependent upon your own self-discipline and your ability to craft a meaningful, realistic budget, and then stick to it.