Personal loan vs. credit card debt

Choosing between a personal loan and a credit card is like deciding between taking a road trip in a reliable sedan or a zippy convertible. Both will get you to your destination, but the journey—and its cost—look different.

We've all been there—weighing options, doing the math, and hoping we're making the right decision. 

Let’s explore personal loans versus credit cards, and how the different options might align with your life, your goals, and your financial health. It's about taking control, making informed choices, and moving forward with confidence. And let's face it, confidence looks good on everyone.

What is a personal loan?

A personal loan is a loan to cover personal expenses. The lender gives you all the money at one time, and you pay it back with interest. You can’t borrow more without taking a new loan.

Personal loans are a type of installment debt. You pay down what you owe in installments, which usually means equal monthly payments. 

Once you make the final installment payment, the debt balance drops to $0. The number of payments you have to make depends on how much you borrow, the interest rate, and the length of the loan.

What is a credit card?

A credit card account is credit that you can access again and again. When you're approved for a credit card, the card issuer tells you how much you can spend. That's your credit limit. 

As you charge things to the card, your available credit shrinks. When you make a payment against your balance, that frees up more of your credit limit. 

Credit cards are revolving debt, since the balance can go up or down depending on whether you add to your balance or pay it down. You can borrow, repay, and borrow more on the credit card as often as you like, up to your credit limit, indefinitely.

Credit cards usually have a payment grace period. That’s the time between your monthly statement closing date and the day your payment is due. If your card has a grace period and you pay off the statement balance by the payment due date, you won’t be charged any interest on those purchases. Once the grace period passes, you’ll pay interest on the entire balance until you pay it off. 

Not all transactions get a grace period. If you take a cash advance, for example, you will probably pay interest from the day of the transaction. A cash advance is just what it sounds like. Instead of buying something with the credit card, you get the cash directly. Some credit cards allow you to access cash at the ATM or in a bank branch. 

Related: What is a secured credit card and how does it work?

Personal loan vs. credit card debt comparison

Personal loans and credit cards both let you borrow money, but they don't work the same way. Here are some of the things personal loans and credit cards have in common, and what makes them different. 

Interest rates

Personal loan rates are usually fixed. That means the lender sets the rate when you get the loan and it never changes. A fixed rate also means a fixed monthly payment. 

Credit cards typically have a variable interest rate. The interest rate can change along with the economy. Your credit card issuer will watch a benchmark interest rate. If the benchmark rate goes up then your credit card APR, or Annual Percentage Rate, can increase too. And if the benchmark rate goes down, your card's APR can decrease. 

Repayment terms

Personal loans have a set repayment term, which represents the number of payments you'll need to make to pay off the loan. A typical personal loan term is anywhere from 12 to 60 months. The payment is calculated to completely pay off your loan by the time your loan term is over. 

Credit cards don't work that way. Credit card debt is open-ended, since you can use your credit limit over and over. You just have to make at least the minimum payment your credit card company requires by the due date each month. The minimum payment typically covers that month’s interest plus a little more. You can look on page one of your credit card statement to find out how many years it'll take to pay off your current balance with only minimum payments. 

Impact on credit score

Whether you apply for a personal loan or a credit card, the lender is likely to do a hard credit check, which causes a temporary dip in your credit score, rather than a soft credit check. 

Personal loans usually show up on your credit reports. Having a personal loan can help your credit score in a couple of ways:

• Making on-time payments helps you build a positive payment history

• Lenders like to see that you have experience with different kinds of debt, including installment loans

Credit cards also show up on your credit report and could help you build good credit if you're paying on time and keeping your credit utilization low. Credit utilization means how much of your available credit you're using. The lower this ratio is, the better for your score. 

Can personal loans or credit card debt hurt your credit? Absolutely, if you pay late or stop making payments altogether, or if your credit card balance is high compared to your credit limit. 

Flexibility and accessibility

Personal loans can be used in lots of different ways. You might use one to cover an emergency expense, pay medical bills, fund a wedding—just about any expense you can think of. 

Credit cards can do the same thing but have lower spending limits on average. Personal loans tend to range from $5,000 to $50,000. The average credit card limit was about $30,000 in 2020, spread across multiple cards. Credit card limits can start as low as $200.

Accessibility is more or less the same, in terms of finding personal loans or credit cards to apply for. A quick online search can turn up plenty of options. 

Whether you can get approved for a personal loan or credit card usually depends on:

• Credit scores

• Income

• How much debt you already have

• How much you need to borrow

Choosing between a personal loan and credit card

How do I decide whether to use a credit card or a personal loan for a large purchase or project? Either one could meet your needs, but one may be a better fit, depending on the specifics of your situation. 

Here are some examples of when it could make sense to choose a loan over a credit card, or vice versa. 

When to choose a personal loan

• You know how much you need to borrow. Personal loans are usually a better fit when you have a dollar amount in mind. For example, if you're planning to renovate your bathroom and you've worked out a $35,000 budget, you might opt for a loan to cover the costs.

• You're consolidating debt. Personal loans are a popular way to consolidate debt. You can get a fixed rate loan and use it to pay off higher-interest credit card debt. Debt consolidation could streamline your finances by reducing multiple monthly payments down to one. 

• You want predictable payments. Getting a personal loan could make sense if you want to pay the same amount each month. You could choose a loan term that results in a payment that's a good fit for your budget.  

What are some tips for managing personal loan repayment effectively? Before you get the loan, get quotes and look at what your payment might be with different interest rates and loan terms to decide what's affordable. 

Once you get the loan, it’s a good idea to set up automatic payments. Some lenders may give you a discount if you do. Automating payments means you don't have to worry about missing a due date. And even a small rate discount could make a big difference in how much you pay interest. 

When to choose credit card debt

• You don't know how much you need to borrow. Credit cards let you spend as needed; you don't need to have a set amount in mind. Just remember that using a lot of your credit limit could have a negative impact on your credit score.

• You want to earn rewards. Some credit cards let you earn points, miles or cash back when you spend. You might be able to redeem those rewards as a credit against your balance, for cash back or gift cards. Personal loans don't offer that.

• You're trying to build credit. Charging small amounts to a credit card and paying it off in full each month could help give your credit score a boost. If you manage it carefully, you could get the dual benefit of on-time payments and low credit utilization. 

If you can't pay the entire balance in full, it's a good idea to pay as much as you can above the minimum. Otherwise, you might not make much of a dent in what you owe. 

What's next

• Make an estimated budget of what you need to borrow to cover the expenses you plan to pay. 

• Get a personal loan rate quote to see how much you might be able to borrow and what interest rate you qualify for. 

• Compare credit card offers to see which cards might be in range, based on your credit profile.