Loan or Credit Card – Which Should I Get?

Loan Or Credit Card

If you need to borrow a large amount of money to cover substantial expenses, you may be considering applying for credit cards or personal loans. You can use both to finance big-ticket purchases or unexpected expenses, but whether a personal loan is better than a credit card depends on numerous factors. These include how much you’re borrowing, how soon you can make your payments, and what you’re using the money for—helping you find the best option between the two.

With that in mind, here’s what you should know about these options, and when you should use a personal loan when to use a credit card, and their pros and cons.

Credit Card or Loan

A credit card allows you to borrow up to a specific limit referred to as ‘credit-limit,’ as set by the issuer. The limit can be a few hundred to more than a thousand and is often determined by your credit rating. Generally, the higher your credit score or income, the higher the limit is likely to be. Your credit card issuer will have set a minimum payment charged you must make for the next couple of months, but it’s often low, so it’s best to pay more each month if possible.

As you make timely repayments, you get to borrow again. Some card issuers offer 0% interest or completely interest-free deals for several months, but others may charge interest unless you pay the full balance for the monthly payments. On the other hand, a person lets you borrow more money as a lump sum, meaning you must repay a fixed amount charged every month over a set ‘term,’ or time, which usually lasts between 1 and 5 years. However, some let you borrow for seven years and beyond.

When to Use a Personal Loan

A personal loan is essentially an instalment loan, where you can borrow a large amount of money for a specific time and make fixed monthly payments until you repay the loan. After you’ve fully finished your repayments, it’s considered closed, meaning if you want to borrow again, you must apply for a new loan. You can get a personal loan from banks, credit unions, and lenders—and you can use it to pay off your debt or for expensive purchases.  

For example, you may apply for a personal loan to pay a large credit balance you have at a lower interest rate or consolidate each debt into a single payment every month. 

That said, here are the benefits and best times to use a personal loan.

  • If you have a good credit rating alongside a stable income, you can get a personal loan with a lower interest rate—with some offering an interest rate as low as 6%. 
  • A loan lets you borrow up to $50,000, which is more than the standard limits. 
  • Personal loans let you get a lump sum of cash, allowing you to pay entities that don’t accept cards. 

However, they have their downsides too, these include: 

  • Even if you don’t have the means to pay your debt, you must pay for the monthly fees. 
  • You also need to address origination fees, which is the percentage of the whole loan amount. 
  • Giving less than the fixed charged instalments often gets reported as ‘late payments,’ hurting your credit scores.

When applying for a personal loan, never forget to get as much information you need from different lenders to understand all the costs involved to avoid paying hidden charges, alongside interest, origination fees, and possible penalties when you fail to pay for a specific period.

When to Use a Credit Card

A credit card lets you charge up to the maximum amount of money or credit limit, allowing you to carry a balance transfer from one month to another—and you often get charged interest on that transfer. The minimum amount you must pay for each month depends on how much credit you’ve utilized. You also decide how much you want to pay off each month. 

Here some of the benefits of using a credit card and when it’s the best time to use a credit card. 

  • As long as you have a decent credit score or rating, it’s relatively easy to qualify for a credit card.  
  • They offer more flexible payment options, so if you can’t repay the full balance in one month, you can adjust and stick with the minimum. It’s a great help for individuals with unstable income. 
  • Some issuers offer rewards like cash back and travel miles, based on the user’s spending. 
  • If you pay the full balance for each month entirely, you’re free from paying any interest. 
  • If you have existing debt or balance a high-interest credit card, you can transfer the credit card balance to a ‘balance transfer card,’ offering an interest-free time of use. 

However, like loans, credit cards have their downsides too, including:

  • A credit card typically has a higher interest than loans. The average credit card has an annual percentage (APR) of over 17%, where loans only hover around 6%. If you find yourself carrying a large balance, expect interests to add up—fast. 
  • Credit cards charge late repayments and annual fees. 
  • If you find yourself paying every two months or so than the intended monthly charges, the card issuer may raise your interest. 
  • If you want to get a lump sum via a credit card, you need to take a cash advance on it, which comes at higher fees. 

If you’re only looking to borrow a small sum of money, it’s best to go with this option. However, ensure to get complete information for each issuer to avoid paying for hidden charges.

How Personal Loans and Credit Cards Impact Your Credit Scores

Besides providing you with the money you need to borrow, personal loans and credit cards have their advantages, with one benefit being boosting your credit scores. Making your monthly payment on time can help prove that you’re going an excellent job managing your debt, allowing you the get the funds you need while giving your credit score a significant boost.

When using credit cards, keep your credit utilization at least below 30% to improve your credit score. It measures the percentage of revolving credit available and using—and the lower the ratio, the better. Meanwhile, personal loans may add variety to your credit mix, one of the crucial factors determining credit scores. If you use a personal loan to pay your credit card debt, you may reduce your credit utilization ratio.

However, remember that personal loans and credit cards have their pros and cons, meaning they can also hurt your credit. Lenders usually weigh payment history more heavily than other scoring factors, accounting for 35% of your credit rating. Making the minimum monthly payment charged can help build your credit score over time. However, making even one late payment can negatively impact your credit, making it challenging to apply for a personal loan or credit card in the future.

Interest rates on Credit Cards vs Loans

Personal loans usually have a lower interest rate than credit cards. That’s because credit cards fall into a ‘different’ class of borrowing called ‘revolving credit.’ A revolving credit account is where the borrower usually has open access to the funds as long as it stays in good standing with a decent credit score. It can be eligible for credit-limit increases regularly and have higher interest rates than a traditional personal loan.

The reason for the high-interest rates of credit cards is due to the risk the lender is offering. That’s because, for banks and other card issuers, credit cards offer instant funds to the borrower, making it inherently risk since lots of people tend to pay late—or don’t even pay at all. That’s why these issuers charge a high-interest rate, compensating for the risks. Meanwhile, for personal loans, although they have a lower interest rate than a credit card, they may have higher rates than secured products than a home equity loan, especially if you have a poor or low credit rating.

So, if you plan on borrowing a large of money to pay existing debt, personal loans are a better option as it doesn’t accumulate as much as interest. Meanwhile, credit cards work better for short-term purchases or debt you need to pay as they usually have high-interest rates, leaving people to pay more than they originally borrowed. Card issuers also offer 0% interest credit cards but always know their requirements before applying for one to see if you must pay interest fees or not.


Before you apply for a personal loan or credit card, it’s always best to carefully consider your options. However, generally, if you’re looking to borrow a large sum of money, personal loans are the better choice than credit cards but remember that with loans, you’ll need to make fixed monthly payments, so you must ensure you can afford to pay the fees every month.

In contrast, credit cards are best if you need to borrow a smaller amount of money or want more flexible payments. Applying for a credit card may also let you borrow money interest-free for a set period. Just ensure to pay off slightly over the minimum every month so you can clear your credit card debt faster and cheaper.

Whichever of the two you pick, make sure to do your research and know as much information. Compare the different loans and credit cards available and consider their interest rates, repayment terms, and any additional fees to find the option that can help you pay for your leisurely and practical needs while making long-term financial sense.

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