Money Makeover: Revealing Card & Loan Truths

Introduction to Credit Choices

A credit card or a personal loan are your two options if you need to borrow money. Both demand that you return the principle amount borrowed plus interest, but there are several distinctions to be mindful of.

This post will discuss the differences between a credit card and a personal loan, their benefits and drawbacks, and which option is best for large purchases.

Key Similarities and Differences

What distinguishes credit cards from personal loans?

There are two kinds of credit: credit cards and personal loans. What unites them is as follows:

  • You must pay for both on a monthly basis.
  • In addition to the principal amount borrowed, you will repay interest.
  • The majority of credit cards and personal loans are unsecured, meaning they lack collateral backing.
  • When you apply for either, a credit check is usually required.
  • Applicants with good to exceptional credit receive the greatest terms, yet it is possible to get a credit card or loan with weak credit.

Credit Cards vs. Personal Loans: Interest Rates and Repayment Schedules

Here are the main distinctions between credit cards and personal loans:.

Term loan versus revolving credit

A personal loan allows you to borrow money all at once, while credit cards are a form of revolving credit. With a personal loan, you take out a fixed amount of debt and pay interest on it over a preset length of time. You receive a line of credit that you can charge up and then pay off when you have revolving credit, such as a credit card or home equity line of credit (HELOC). You have two options: either pay the minimal amount due each month or settle the debt in full.

Variable versus fixed interest

Because personal loans have set interest rates, your interest rate won’t fluctuate over the course of the loan. Variable interest rates on credit cards can rise or fall based on a number of variables, including market rates and timely bill payments.

Both credit cards and personal loans use the annual percentage rate (APR) to indicate the cost of borrowing money. APRs on personal loans are generally lower than those on credit cards, especially for borrowers with high to exceptional credit.

Understanding Fees and Charges

Timetable for payments

Your monthly credit card payment is determined by the amount you have charged. Although minimum payments differ depending on the credit card company, they typically range from 2% to 5% of the total amount due. If the amount owed is small, like $35 or $40, the whole amount can be due at once. You have the option to pay more than the minimum each month, which can shorten your payback period and save you money on interest.

When you take out a personal loan, you know the amount you need to pay each month is set in stone. When you take out the loan, you are aware of the amount you will need to pay each month. Because you repay personal loans in monthly installments, they are also known as installment loans.


Credit cards and personal loans have several kinds of fees. Before you sign any credit card or loan deal, make sure you have read the terms.

Typical costs for personal loans

  • Origination fee: Some lenders assess an upfront charge called an origination fee, which can reach 8%. You would need to borrow a little bit more than $10,300 in order to receive $10,000 if your lender assessed a 3% origination fee on a $10,000 loan.
  • Prepayment penalty: If you pay off an installment loan early, some lenders will assess a fixed cost or a specific amount of interest.
  • Late Fees: If you fail to make your payment by the deadline, you will be responsible for paying a late fee. While some lenders charge a fixed price, such as $25 or $30, others charge a percentage of your balance.

Typical credit card costs

  • Annual fees: Although not all credit cards have one, credit card annual fees can vary from less than $50 to over $500. Some of the greatest rewards credit cards assess a significant annual fee, but it may be worth it if you plan to spend enough to accrue significant rewards.
  • Late fees: If you fail to make your payments on time, you will typically incur late fees, similar to personal loans. Furthermore, the lender may assess a penalty APR, resulting in a higher interest rate.
  • Fees for foreign transactions: Certain credit cards impose fees of up to 3% on purchases made outside of the United States.
  • Balance transfer fees: In order to benefit from a cheaper annual percentage rate, some consumers move their credit card balances to another credit card. However, you should be prepared to pay a balance transfer fee with these cards, which ranges from 3% to 5% of the amount you transferred to the new card issuer.

Rewards and Incentives: A Comparison

Certain credit cards offer incentives such as cash back, airline miles, or points that can be redeemed for gift cards, statement credits, or to cover costs when making purchases on specific websites. Personal loans don’t have the same reward systems as credit cards do.

An illustration of how credit cards and personal loans operate

Let’s say you wish to set up $10,000 in case of need. You are debating between a credit card with a 20% annual percentage rate (APR) and a 24-month personal loan with a 12% APR.

Should you opt for a personal loan, the amount you pay each month will stay the same, approximately $470, throughout the whole 24-month loan term. Let’s say you maintain the remaining $8,000 in cash and just need to spend $2,000. The full $10,000 you borrowed, or a total of $1,297 over 24 months, will still incur interest charges.

When selecting a credit card, let’s say you were given one and charged $10,000 at a 20% annual percentage rate right away. It would take you 109 months, or nine years and one month, to pay off the full amount if your minimum monthly payment was $200 and you just made the minimum. $11,680 in interest would be due.

If you commit to paying off the card in 24 months and your APR remains the same, your monthly payments will be $508. With a 24-month term and $2,214 in interest, you would pay a lot less in interest.

However, what if you took out a $10,000 line of credit and were only charged $2,000 due to an isolated emergency? If you made $101 monthly payments to pay off the total amount, you would only pay $443 in interest over the course of 24 months. You only paid interest on the amount you required to use the credit card, so even with the significantly higher APR, you still made financial savings.

Impact on Credit Score: Credit Cards vs. Personal Loans

When you apply for a loan or credit card, most financial organizations check your credit history. This leads to a hard inquiry on your credit report, which could temporarily lower your credit score by a few points.

Both credit cards and personal loans can help you establish credit and raise your credit score over time if you pay your bills on time. Alternatively, your credit score will suffer if you miss payments entirely or make them after the deadline. This is because the three credit bureaus will receive a report on your payments from your lender. More than any other credit factor, your payment history makes up over 35% of your credit score.

However, compared to personal loans, credit card debt is really bad for your credit score. This is because your credit usage ratio, or the proportion of open revolving credit you are utilizing, accounts for 30% of your credit score. It is preferable to have a lower credit utilization ratio. Experts generally advise keeping this figure at 30% or below.

Typically, an outstanding loan balance does not lower your credit score because only revolving credit factors into your credit utilization ratio. For this reason, a personal loan is a popular choice for debt consolidation. By combining your credit card debt into one loan, you can reduce your credit utilization right away and typically save money on interest.

However, bear in mind that when you apply for financing, lenders take into account a variety of factors, including your credit score, to determine your creditworthiness. Having high loan balances will still increase your debt-to-income ratio, which can make it more challenging for lenders to approve your mortgage or other credit applications.

Practical Scenarios: Credit Cards and Personal Loans in Action

In an emergency, you may require a credit card or a loan, but which should you use?

Using a credit card can be the easiest option if your credit limit is large enough to cover the cost and you are sure you can pay it off fast. To borrow money and avoid having to wait for funding, you won’t need to apply at a bank or credit union. For a relatively small one-time emergency expense, such as an urgent care bill or auto repair, a credit card works well.

When it comes to higher emergency expenses, such as a significant medical bill or home repair, a personal loan is a preferable choice. Usually, you can lock in a cheaper rate. With set payments, you’ll know exactly how much to set aside each month. Although some lenders provide same-day funding, bear in mind that many personal loans take one to five business days to fund. If you are in urgent need of money, it is crucial that you remember that deadline.

In an emergency, you may require a credit card or a loan, but which should you use?

Two warnings:

  • A credit card is insufficient when you have an urgent need for cash. Taking out a cash advance, which allows you to borrow money against your credit line, is one alternative. However, compared to credit card and personal loan rates, cash advance interest rates are typically substantially higher. They frequently begin to accrue interest immediately, in contrast to credit card purchases. Prior to taking out a cash advance, make sure you are eligible for a personal loan with a lower interest rate.
  • A credit check is not necessary for payday loans, a sort of short-term personal loan, but the interest rates are very high. Although some jurisdictions have regulated interest rates, many charge 400% APR or more. Payday loans are typically the priciest form of borrowing money, and they frequently force borrowers into a never-ending debt cycle.

Advantages and Disadvantages of Personal Loans

The following list of advantages and disadvantages compares personal loans to credit cards:


  • APRs are lower: The finest personal loans often feature cheaper interest rates than credit cards, especially if you have strong credit; however, APRs vary by provider. Many people utilize personal loans as debt consolidation loans because the APRs are typically cheaper than credit card rates.
  • Set payments: The borrower knows the loan amount and terms up front, so they can budget for an installment loan with set payments. You can budget for an installment loan because you know the loan amount and terms up front and because the payments don’t fluctuate from month to month.
  • Personal loans have greater limitations in comparison to credit cards: Personal loan limitations might range from $50,000 to $100,000, depending on the lender and your creditworthiness. That’s a lot more than most credit card limitations allow.
  • Less chance that you’ll start depending on loans: Borrowing a set amount of money and repaying it according to a timetable through a personal loan reduces the likelihood of being tempted to make unfinancial purchases.
  • Debt from personal loans: It has a greater impact on your credit score compared to debt from credit cards because it does not affect your credit utilization ratio. Debt from personal loans lowers your credit score more than debt from credit cards because it doesn’t affect your credit utilization ratio.


  • On money you don’t need, you can pay interest: Even if you only end up spending a portion of the money you borrow, you will still be responsible for interest payments on the full amount.
  • If you want to borrow more, you’ll have to reapply for a loan: Using a credit card, you may simply request an increase in your credit limit and top off your line of credit as needed. However, if you need to borrow more money with a personal loan, you’ll probably have to apply for a new one.
  • No incentives: Although many credit cards offer substantial rewards systems, personal loans do not qualify for these rewards.

Advantages and Disadvantages of Credit Cards


  • Able to borrow as much as you need: You can charge against your credit line as needed and then pay it off because credit cards are revolving credit. On the other hand, you must predetermine how much you wish to borrow while taking out a personal loan. You will incur needless interest if you end up borrowing more than you need.
  • Prevent interest: You can avoid paying interest if you make monthly payments in full against your credit card debt. Some credit cards even provide a brief, initial 0% interest-free term that lasts for 12 to 21 months; however, you usually need good credit to qualify.
  • Rewards are available for purchases: Credit cards frequently offer rewards on purchases, including cash back, points, and airline miles. However, carrying a balance and paying interest will usually offset the value of your credit card benefits.
  • More practical than a personal credit card: With a credit card, you have an endless credit line that gives you simple access to borrowed money. A credit card is useful for regular expenses and emergencies because you don’t have to apply for a new one every time you need money. By calling your credit card company, you can also ask for an increase in your credit limit.


  • Interest rates can be high: Interest rates on credit cards are often higher than those on personal loans. Many store credit cards have interest rates as high as 30% APR, making them exceptionally expensive.
  • The urge to overspend: A high credit limit may tempt you to use your credit card for unnecessary or extravagant expenses. The minimum payment typically only accounts for a small portion of the entire sum, so you might not realize how much debt you’re accumulating. When all of your daily costs are covered by credit cards, it’s easy to live beyond your means.
  •  Credit card debt: It can have a significant negative effect on your credit rating.  Credit card debt will have a more negative impact on your credit score than personal loans, as your credit usage ratio is determined by the proportion of revolving credit you use.

Making the Right Choice for Your Financial Needs

Which is better for you, a credit card or a personal loan?

When you need a loan, credit cards and personal loans are both readily available choices. As is often the case with personal economic decisions, there is no one-size-fits-all answer.

Generally speaking, a personal loan is ideal for:

  • Combining debt with high interest rates can lead to financial difficulties.
  • Home renovations are major undertakings that can involve significant costs.
  • There are various situations where you may find yourself in need of money.

Usually, a credit card is preferable for:

  • Daily expenses
  • Making a significant purchase can be more affordable if you qualify for a temporary 0% APR.
  • Lower emergency costs

Whether you decide on a credit card or a personal loan, prudent borrowing and spending are essential. Don’t take out more personal loans than you need. If you do this, your interest costs will increase. Similarly, refrain from overloading your credit card with unnecessary purchases. If you use your credit card for everyday purchases, make an effort to pay the entire amount off each month. You won’t pay exorbitant interest, and you won’t be as inclined to spend more than you can afford.


Which debt is worse, credit card debt or personal loans?

In general, credit card debt has a higher interest rate and is generally worse for your credit score than personal loan debt. Nonetheless, there are instances in personal finance where using a credit card makes sense, such as when you’re taking advantage of 0% APR on a significant purchase.

Which is preferable: paying off a personal loan or a credit card first?

Generally speaking, it’s better to pay off credit cards first. Since the APRs are typically higher, you’ll pay less in interest and improve your credit score by lowering your credit utilization ratio.

When is it appropriate to use a credit card rather than a loan?

The best payment method for both everyday expenses and short-term payments is a credit card. Using a credit card for a large purchase makes sense if you are eligible for a brief 0% interest term. But only if you can pay it off before the interest-free window closes.

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About the author

As a Personal Finance Expert with extensive experience, I'm here to guide you through the complexities of money management. My expertise covers everything from budgeting to investing, aimed at helping you make informed financial decisions. My approach is to simplify financial concepts and offer practical strategies for achieving financial freedom and stability. Whether you're beginning your financial journey or seeking to enhance your plan, join me in exploring effective personal finance techniques, customized to suit your individual needs and aspirations.

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