Should You Take Out a Personal Loan or Use a Credit Card?

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Personal loans and credit cards can both be smart financial tools, but one could be the better choice for you. Here’s how to tell. 

When it comes to financing large purchases or consolidating debts, two of the main ways you can do it are personal loans and credit cards. Both can be excellent financial tools in the right circumstances.

But which is best for you? Here’s a quick guide of how you can compare the two financing options to figure out which is the better fit for your borrowing needs.

How long do you need to pay the money back?

If you’re able to pay the money back right away — or even within the next few months — a credit card typically makes more sense. If you pay your credit card balance in full before your next statement, you won’t pay any interest at all. Plus, even if you have to pay a month or two of credit card interest, it can be better than a personal loan, especially if the personal loan has an origination fee.

Personal loans are generally the better choice if you need years to pay back the money you borrowed. Even if your personal loan’s interest rate is comparable to that of a credit card, it can be useful to have a fixed repayment schedule and a clearly defined loan term.

On the other hand, many credit cards offer 0% intro APR deals that can allow you to finance purchases for a certain amount of time with no interest whatsoever. Our favorite 0% intro APR credit cards have promotional periods ranging from six to 21 months, so if you’re confident you can pay off your purchase within that time window, it could be a smart way to go.

What interest rates are offered?

While there are other factors to consider, it’s still important to compare your borrowing costs.

When it comes to credit cards, the average interest rate in the United States is 23.84%, according to LendingTree. And most Americans can’t tell you what their interest rates are on their individual credit card accounts. You can usually find yours online or by looking at your latest credit card statement if you aren’t sure. Obviously, if you’re using promotional financing with a 0% APR, you don’t need to worry too much about it, but it’s still worth knowing what interest rate you could have to pay.

With personal loans, you can quickly and easily check your interest rates with as many lenders as you’d like. Most online personal lenders will show your personalized loan offers after you fill out a short prequalification form and agree to a soft credit check.

How much do you need to borrow?

There is absolutely no way to know what your limit on a new credit card will be until you apply. But in general, the typical borrower can get approved for a higher amount with a personal loan than with a credit card. Our favorite personal lenders offer loans in amounts ranging from $1,000 to $100,000. Meanwhile, the average American has a little over $31,000 in combined credit limits from their credit cards.

The point is that if you need to borrow a five-figure sum of money (or more), you might have difficulty putting it on a credit card.

What impact will this have on your credit score?

One other thing you may want to consider is how each type of debt impacts your credit score.

The FICO credit scoring formula, as well as most others, consider the amounts you owe on debts. In the FICO formula in particular, “amounts you owe” makes up 30% of your score. Although this includes the amounts you owe on revolving debts like credit cards as well as installment loans, they aren’t treated equally.

Generally speaking, installment loans are considered far more favorably in credit scoring. And that’s especially true if you’re comparing a new personal loan to a credit card with a relatively high balance compared with its credit limit. So, if you need to finance a large purchase, a personal loan is typically the better choice from the standpoint of which could have the most negative impact on your credit score.

Which is best for you?

As you have probably figured out, there’s no perfect answer. It depends on your unique situation. But now you have a framework for comparing credit cards versus personal loans, so you’ll be able to figure out the best choice for you.

Our picks for the best credit cards

Our experts vetted the most popular offers to land on the select picks that are worthy of a spot in your wallet. These best-in-class cards pack in rich perks, such as big sign-up bonuses, long 0% intro APR offers, and robust rewards. Get started today with our recommended credit cards.

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