Personal Loans vs. Credit Cards

Both types of credit offer some flexibility. While a tool like a home loan or business loan may only cover specific costs, you could use credit cards or personal loans for most purchases.

However, personal loans and credit cards have some key differences that are important to understand. 

Type of credit

A personal loan is an installment loan. When a lender approves your loan application, you typically receive one lump sum that you’ve already agreed upon.

On the other hand, a credit card is a type of revolving credit. Typically, card issuers set a credit limit for each new account, depending on the applicant’s creditworthiness. You may use your credit card as needed, up to your credit limit. If you reach your credit limit, you have to make a payment before you can use your card again.  

Interest rate

Personal loans generally have fixed interest rates. You pay interest over the course of your term on the amount you borrow.

For credit cards, interest rates and annual percentage rates (APRs) are closely related. Typically, a credit card has a variable interest rate, which may fluctuate with economic changes. Credit cards often have higher interest rates than personal loans. However, an applicant with a high credit score may qualify for a better rate.

Most credit card companies typically only charge interest on the balance you carry from month to month, so you may save on interest by paying your balance in full. 

Monthly payment

You typically repay your personal loan in fixed monthly payments over a set term. Your loan payment amount usually stays the same throughout the repayment period.

On the other hand, your monthly credit card bill may vary based on the amount you spent during the billing period, your existing balance, and your interest rate. You may choose to repay your balance in full each month, make the minimum payment your credit card company requires, or pay any amount in between.

Rewards

Personal loans don’t usually offer rewards, but some credit cards do.

Credit score impact

Both credit cards and loans usually appear on your credit report and affect your credit scores. Whether you have credit cards, loans, or both, timely payments are vital for maintaining a strong credit history and high credit score.

Using a credit card may also impact your score by increasing your credit utilization ratio, the portion of your available revolving credit in use at one time. High credit utilization may hurt your score, so it’s a good idea to keep your balances well below your credit limits. Personal loans don’t affect credit utilization.

Managing a mix of both loans and credit cards responsibly may support your credit mix, which might have a positive effect on your credit score. 

Fees

For both personal loans and credit cards, fees may vary by lender and product.

Some personal loans may charge an origination or administrative fee, which covers the lender’s processing costs. Your lender may also charge you a late payment fee if you make your monthly payment after the due date or miss a month.

Certain credit card issuers may charge an annual fee, especially for rewards credit cards. Other credit card fees to look out for may include:

• Balance transfer fee. You may pay a balance transfer fee if you move your credit card debt to a lower interest card.
• Foreign transaction fee. Some card issuers charge extra to convert transactions in another currency.
• Late payment fee. Like loans, credit cards typically charge you for missing your payment due date. 
• Cash advance fee. You may use your credit card to access cash, but it usually comes at a high cost. 

When to choose a personal loan vs. a credit card

The distinctions between credit cards and personal loans make them each uniquely suited for distinct circumstances.

When a credit card may be better for you

Credit cards could help you manage everyday expenses, like gas, groceries, food, or your morning cup of coffee. To avoid mounting debt, try to use a credit card for purchases you could pay off by the end of the month. Typically, repaying your balance each month protects you from owing much interest.

When a personal loan may be best for you

When you need help financing a specific major expense, like a medical bill, home repair, or cross-country move, a personal loan may help. Because they pay a set amount, you may borrow exactly what you need.

 A personal loan with a low interest rate may also work well for debt consolidation. If you have several other outstanding loans that have become difficult to repay, you could use a personal loan to secure more reasonable terms.

You may also easily incorporate personal loan payments into your monthly budget. Because installments and interest are fixed and don’t change, you shouldn’t face any surprise bills. However, missed loan payments may quickly hurt your credit score, so budgeting carefully is important.

The bottom line

If you’re deciding between a personal loan and a credit card, you may want to consider the type of expense you wish to cover, your budget, and your financial goals. Whatever you choose, responsible habits could help you maintain a good credit score.