Key Takeaways:
- Personal loans work best for big, one-time expenses or important bills.
- Credit cards are ideal for daily spending and earning rewards.
- Both can improve your credit score if used responsibly.
- Always compare interest rates, fees, and repayment terms before choosing.
- Knowing when to use a personal loan or a credit card can help you avoid money problems in the future.
Both personal loans and credit cards are useful when you need extra money, but how you repay them matters a lot. Choosing the right option for your situation can help you stay financially stable.
If you need a large amount of money all at once—for example, to pay off other debts or to fund a project—a personal loan might be the better option. But if you’re paying for regular everyday purchases, a credit card is likely more convenient and flexible.
Understanding Personal Loans vs. Credit Cards
A personal loan gives you a one-time lump sum of money, minus any origination or setup fees. You repay it in fixed monthly installments over a set number of months—usually between 1 to 7 years. These loans are typically used for big expenses or to consolidate other debts.
A credit card, on the other hand, is a type of revolving credit. This means you can borrow repeatedly up to a certain limit as long as you pay back what you owe. Credit cards are usually better for ongoing or small daily purchases.
Main Differences Between Personal Loans and Credit Cards
When deciding between a personal loan and a credit card, take a close look at how they’re structured—especially how you receive the money, interest rates, fees, and how you’re expected to pay them back.
| Feature | Personal Loans | Credit Cards |
|---|---|---|
| Average Interest Rates | Around 12.43% | Around 20.12% |
| Repayment Terms | Fixed monthly payments over 12 to 84 months | Flexible—pay minimum or full balance monthly |
| Interest Type | Fixed interest | Usually variable interest |
| Funds Access | Lump sum once at approval | Ongoing access up to your limit |
| Fees | May include origination, prepayment, or late fees | May include annual, late payment, over-limit, and foreign transaction fees |
While they work differently, both personal loans and credit cards require monthly payments. Failing to pay on time can hurt your credit score and make it harder to qualify for loans, rent, or even get a job.
When to Choose a Personal Loan
A personal loan is generally a smart choice for larger, one-time costs—especially if you need time to pay it back and want lower interest than a credit card offers.
It’s important to make sure you can afford the monthly payments for the life of the loan before applying. You can use a loan calculator to estimate how much you’ll pay each month based on the loan term and interest rate.
Common reasons to take out a personal loan:
- Combining or consolidating high-interest credit card debt.
- Covering unexpected medical expenses.
- Financing a home renovation or improvement project.
- Paying for a wedding or big family event.
It’s usually not a good idea to use a personal loan for smaller purchases—especially if you could pay them off quickly using savings or your credit card’s grace period. Personal loans always come with interest, so there’s no way to avoid it entirely.
Pros and Cons of Personal Loans
Pros:
- Lower average interest rates compared to credit cards.
- Great for debt consolidation.
- Predictable fixed monthly payments make budgeting easier.
Cons:
- No rewards or points.
- You can’t avoid interest entirely.
- May come with various fees.
- Can be harder to qualify for if your credit isn’t strong.
How Personal Loans Affect Your Credit
Using a personal loan the right way can improve your credit score, but it can also hurt it if you’re not careful. When you apply for a personal loan, a hard credit inquiry is made.
This can lower your score slightly—usually by up to 10 points—and the inquiry stays on your report for two years.
However, repaying your loan on time can help your credit in the long run. Payment history makes up 35% of your credit score, so making monthly payments consistently has a big impact.
Also, if you use the loan to pay off credit card debt, your credit utilization ratio will decrease, which can improve your score too.
Who Should Consider a Personal Loan?
If you have good to excellent credit and you’re trying to refinance expensive debt, a personal loan might be a smart move. The interest rate is often lower than what you’re paying on credit cards, which can save you a lot of money.
A personal loan is also helpful if you have a major cost coming up—like home improvements or a wedding—and you need a specific amount of money upfront. Since personal loans usually have better interest rates than credit cards, they make sense if you don’t want to keep a balance on your card.
When to Use a Credit Card
Credit cards are best for regular spending and when you want to earn cash back, points, or travel rewards. However, you should only use your credit card for expenses you can pay off within a short period of time.
If you don’t pay the full balance each month—and your card doesn’t offer 0% interest for an introductory period—you’ll start to accrue interest. Making only the minimum payment each month can keep you in debt for years.
Smart ways to use a credit card:
- Daily purchases like groceries or gas.
- Paying for a planned trip or vacation.
- Earning points, miles, or cash-back rewards.
- Taking advantage of a 0% APR introductory period.
Avoid using credit cards for big expenses you can’t pay off soon, such as medical bills or large home repairs. A personal loan is often better in those cases.
Pros and Cons of Credit Cards
Pros:
- Great for earning cash back, points, or other perks.
- Can help boost your credit score when used responsibly.
- Convenient and widely accepted.
Cons:
- Interest rates are often very high.
- It’s easy to spend more than you can afford.
- Includes various fees, such as annual and late payment fees.
How Credit Cards Affect Your Credit
If you use your credit card responsibly and pay your full balance each month, your credit score can increase over time.
Your payment history is the most important factor in your credit score, and paying on time helps establish a positive track record.
Also, if you keep your credit card accounts open for many years and avoid late payments, the length of your credit history—worth 15% of your FICO score—can help improve your credit health.
But carrying high balances and missing payments can hurt your score. High credit utilization, which means using too much of your available credit, can bring your score down. It’s best to keep your utilization under 30%.
Bottom Line
Both personal loans and credit cards can be helpful tools if you use them wisely—but they can also cause financial trouble if misused. The best option depends on your spending habits, financial goals, and how much money you need.
Before you choose, take the time to compare interest rates, fees, and repayment options. Getting prequalified can give you a better idea of what rates you might get.
Remember, you don’t always have to choose one or the other. Many people use both: a personal loan for big one-time expenses and a credit card for everyday spending and rewards.
Frequently Asked Questions
Which has a bigger effect on your credit score: personal loan or credit card?
Both can impact your credit depending on how you use them. A personal loan can help reduce your credit utilization ratio, while credit cards help build a longer credit history. Paying either one on time is key to improving your score.
Will paying off credit cards with a personal loan improve my credit?
Yes, it can. Using a personal loan to pay off credit cards lowers your credit utilization, which can raise your score. Just make sure to make on-time payments on your loan to keep your credit healthy.
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