Credit card vs personal loan (2024)

FAQs

Credit card vs personal loan? ›

Personal loans have relatively lower interest rates than credit cards, but they must be repaid over a set period of time. Credit cards provide ongoing access to funds and you only pay interest on outstanding balances.

Key takeaways. Personal loans are best for large, one-time purchases or bills. Credit cards are best for everyday spending and reward systems. Both can have a positive impact on your credit score if used responsibly.

The biggest difference between a personal loan and a credit card is that with a personal loan you're given a lump sum upfront, whereas a credit card you're given a limit that you can spend up to.

If you have a large expense and are able to make regular payments, a personal loan may be the better option. Personal loans provide a lump sum of money with fixed interest rates and fixed payment periods.

A Credit Card Loan is more accessible, but it comes with higher interest rates. While a Personal Loan may offer a comparatively lower interest rate, but could be more challenging to qualify for.

Taking out a personal loan can make more sense than tapping credit cards or home equity in some cases – but it's not always a good idea to borrow one. There are situations where this could be a good idea, but always remember that taking out a personal loan increases your overall debt.

Using a personal loan to pay off debt helps you get rid of multiple payments and go down to one payment per month — and hopefully with a much lower APR. Consider using a debt repayment calculator to determine how much sooner you could pay off your debt with a lower interest rate.

You only pay interest on the funds you use, so you could have an open account with no interest if you have no balance. Unlike personal loans, where your monthly payment is usually the same over the entire repayment period, a credit card bill will vary each month.

A personal loan will cause a slight hit to your credit score in the short term, but making on-time payments will bring it back up and can help improve your credit in the long run. A personal loan calculator can be a big help when it comes to determining the loan repayment term that's right for you.

What rate is too high for a personal loan? ›

A good personal loan interest rate depends on your credit score: 740 and above: Below 8% (look for loans for excellent credit) 670 to 739: Around 14% (look for loans for good credit) 580 to 669: Around 18% (look for loans for fair credit)

A high-interest loan has an annual percentage rate above 36%, the highest APR that most consumer advocates consider affordable. High-interest loans are offered by online and storefront lenders that promise fast funding and easy applications, sometimes without checking your credit.

To fully show lenders that you're capable of handling flexible credit accounts, you have to use it regularly and make your payments on time. "It's not that you can't have great credit scores with just installment loans," Griffin says. "It's just that a credit card ... gets you there a little bit faster.”

Personal loans can boost your credit score by adding to your credit mix, improving your credit utilization and your payment history. Applying for a personal loan can hurt your credit score temporarily by adding to your current debt, and missing payments can lower it further.

Though they're a form of debt, personal loans can also serve as a tool to build credit. This is because they can contribute to your payment history and credit mix, as well as lower your credit utilization ratio. Collectively, these three factors account for 75 percent of your credit score.

Your credit score can dip a few points when you formally apply for a personal loan, but missed payments can cause a more significant drop. Getting a personal loan will also increase the amount of debt you owe, which is one of the factors that make up your credit score.