If you’re looking to pay for a big-ticket item or tackle high-interest debt, you might be considering a credit card or personal loan.
When deciding between a personal loan vs. credit card, think about how much money you need and how fast you can pay it back. Your credit score, debt, and income will also play a part in which option is right for you.
Here’s how to determine when it’s best to use a personal loan or credit card:
| If you need a large sum of money Learn More |  | |
If you need to borrow a larger amount, a personal loan will have you covered. Credit card limits aren't usually as high as personal loan limits, so only use a credit card when you have a smaller expense. |
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| If you need a set monthly payment Learn More | | |
Personal loans have fixed rates, so you'll always know exactly how much to budget for every month. Credit cards, on the other hands, have variable rates that can fluctuate, so your monthly payment can change. |
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| If you need time to pay it off Learn More | | |
If you need more time to pay your loan off, a personal loan is your best bet. If you can pay the whole amount off in a year or less, however, getting a 0% balance transfer card and paying it off completely before the promotional period ends is the smartest idea. But first, factor in the balance transfer fee to ensure it's worth it. |
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| If you need to consolidate debt Learn More | | |
Personal loans typically have lower interest rates than credit cards, so a loan would usually be your best option when it comes to debt consolidation. |
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| If you need funds immediately Learn More | |
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Although you can get funds from some personal loan lenders as soon as the next business day, sometimes it can take up to 7 days. So if you need funds immediately, and already have a credit card you can use, a credit card will be your quickest option. |
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Still need help deciding between a personal loan and credit card?
When to use a personal loan
If you’re trying to decide, here are a few reasons to choose a personal loan:
- You need to consolidate debt
- You’re making a big purchase
- You want to protect your credit utilization
You need to consolidate debt
A debt consolidation loan is a personal loan you use to pay off high-interest debt, like credit cards, medical bills, and even other loans. With a loan, you make regular, on-time monthly payments on the loan until it’s paid in full.
High-interest debt can derail your finances, so tackling it with a lower rate personal loan can be a good option.
Learn More: How to Pay Off Credit Card Debt
You’re making a big purchase
The more money you need, the better a personal loan is since interest on personal loans tend to be lower compared to credit cards. If you have excellent credit, you can expect to pay anywhere from 10.30% to 12.50% in interest. For good credit, it’s about 14.21% to 15.50%.
The better your credit score, the lower your personal loan interest rate will typically be. And a lower rate can help you save money over a period of time.
You want to protect your credit utilization
When you max out your credit cards, your credit score can go down because your utilization (or credit use) is really high. Using over 30% of your credit utilization doesn’t look good on your credit report. But with a personal loan, your credit utilization doesn’t take a hit, allowing you to use your full balance without getting penalized.
If you’re interested in a loan, it’s good to explore an online personal loan or a loan from a bank or credit union.
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When to use a credit card
If you’re trying to decide, here are a few reasons to choose a credit card:
You’re making a small purchase
If you have a small purchase or can afford to pay the balance off, a credit card can be a better idea.
But you want to make sure you can afford to pay off your credit cards at the end of each pay period. If not, and you carry a balance over to the next month, you could face high interest charges and fees.
You can avoid paying interest
Yes, credit cards have some of the highest interest rates — the average APR for credit cards is almost 18% — but you don’t have to pay interest if you use it wisely. The best way to avoid interest is to pay your balance off in full every month.
Another way, if you’re trying to get rid of high-interest credit card debt, is to use a 0% balance transfer credit card. These offers allow you to move over major credit card debt and pay it off interest-free for a set amount of months. But you must also consider the balance transfer fee in the equation when you’re calculating whether this is a good option for you.
You want convenience and added perks
Paying with a credit card is easy and convenient — especially if you already have one on hand and don’t need to apply for a new one. If you’re savvy, you can also maximize rewards from purchases by making sure you’re using the best card for your purchase. Sometimes you’ll get cash back, a statement credit, or points toward travel and lodging.
Although rewards shouldn’t be the main reason for using a credit card, they can be a nice added perk if you decide a credit card is your best choice.
Personal loan vs. credit card: Which is right for you?
If you’ve got a small balance to pay off, a quick credit card transaction is easy and seamless. As long as you pay off the balance at the end of the month, a credit card is the better choice.
But if you’ve got a major expense and expect you’ll need some time to pay off the balance (like three to five years), consider taking out a personal loan with a lower interest rate instead. Compare some of the best personal loans to see which online lender has the most competitive rates and repayment terms for you.
The bottom line is that no matter your choice, be sure to adjust your budget and make room for a new expense. Think about adding a calendar reminder to make sure you don’t forget about payment due dates — and responsibly pay off your debt.