Personal loan vs. credit card: What’s the best option?

At some point in their lives, most people will find themselves in need of extra cash. Whether you’re trying to pay for some home renovations or facing an unexpected car bill, you might want to borrow money to help cover the cost.

Two popular sources of quick funds are personal loans and credit cards. Personal loans are one of many types of loans that lenders offer. Both have pros and cons and are better suited for different situations. Where personal loans usually have better interest rates, credit cards offer more flexibility.

We’ll break down the key differences between personal loans and credit cards and how to decide which is right for you.

Using a personal loan vs. a credit card

Credit cards and personal loans are similar in that you can use either to borrow money when you need some extra cash. They are both common types of unsecured loans, which means that collateral isn’t used to secure them in many cases. However, they work very differently.

Personal loans are installment loans. That means that you go to a lender and ask for an amount of money. If approved, the lender disburses that money to you as a lump sum, and you pay the loan back over the next few years.

With credit cards, lenders approve you to borrow up to a certain maximum amount. You can draw from your line of credit up to the set limit multiple times on an as-needed basis. If you carry a balance on your credit card from month to month rather than paying off the balance this is known as revolving debt. As you make payments that reduce your balance, your ability to borrow more from the credit card increases again. If you reach your credit limit on a credit card, you can’t borrow more money until you pay down the balance.

This table shows some of the key features of each type of loan.

Both credit cards and personal loans can be secured or unsecured but they are usually unsecured forms of debt. Secured loans and cards rely on some form of collateral that you offer to secure the debt. Unsecured loans or credit cards require that the borrower put up some kind of collateral. There are also different types of personal loans, including fixed-rate loans and adjustable-rate loans. Lenders approve or deny unsecured loans and credit cards based on your finances and credit score.

When to use a personal loan

Both credit cards and personal loans are options if you want to borrow money. Which you choose depends both on your level of comfort with each type of loan and your financial situation.

Some scenarios where using personal loans can be a good fit include:

• You need money for a one-time expense
• You have strong credit
• You’re considering debt consolidation so you can combine other loans or credit card balances into a single loan, typically with a lower, fixed rate of interest
• You can handle the monthly payments

Most personal loans are unsecured, so lenders will be looking at your financial situation, such as your debt-to-income (DTI) ratio and your credit score, to make a lending decision. You’ll need a credit score of at least 620 or higher to have a good chance of qualifying and getting a good interest rate.

Personal loans don’t offer the immediate access to cash that credit cards do, but you can still use them to borrow money quickly. When you prequalify for a personal loan, you can see the terms available to you including the loan amount, interest rate and loan-term length. You can apply for a loan from online lenders, including Rocket Loans, and, depending on the lender’s conditions and policies, you may have your loan funded that same day.

When to use a credit card

Credit cards are useful for immediately paying for emergency expenses. Ideally, you’ll pay those expenses off in full when the bill comes due. Otherwise, you’ll find yourself with a very high-interest debt. According to Forbes, the average credit card interest rate is around 25% as of November 2025. This more than double the average personal loan rate of less than 12%, as reported by the Federal Reserve Bank of St. Louis.

Some reasons to use a credit card include:

• Financing small, necessary purchases
• Taking advantage of promotions, such as 0% APR introductory rates
• You can pay the bill in full at the end of the month
• You want to earn cash back or credit card rewards

Some credit cards come with an introductory period, usually between 12 and 24 months, where the card charges 0% APR. That means you pay no interest as long as you make your monthly payments. It’s easiest to understand what APR is as the yearly cost of borrowing money.

If you have good enough credit to qualify, it can be tempting to use a 0% APR card to consolidate credit card debt and it can be a good way to save money. However, you’ll likely pay a balance transfer fee to move your balances to the card, and if you fail to pay the debt off before the promotion ends, you’ll be stuck with a balance at a high interest rate.

How personal loans and credit cards can affect your credit score

As with any loan, you may wonder if personal loans and credit cards will hurt your credit score. How you handle these debts determines whether the impact is good or bad.

Both credit cards and personal loans will help add variety to your credit mix, which can boost your credit. They’ll also help you build a good payment history, which is one of the most important factors in your score. Of course, this is assuming you make your required monthly payments.

On the downside, both types of debts will increase your overall debt, credit utilization, and your DTI ratio, which will hurt your credit score. Missing a payment on either will also damage your payment history, which can have a big negative impact on your credit.

Keep in mind that any time you apply for a new personal loan or credit card, that gets marked on your credit report and will drop your score by a few points. If you manage your debts, stay on top of payments, and monitor your credit reports, you may be able to improve your credit score.

Pros and cons of personal loans

Personal loans can be a great fit in a variety of situations, particularly if you need to borrow money in a single lump sum. Before you apply for one, you should think about the pros and cons.

Pros and cons of credit cards

Credit cards are good for everyday spending and quickly handling small emergencies, but it’s important to pay the bill in full when it arrives. Consider these pros and cons before you use one.

Alternatives to personal loans and credit cards

If you find yourself needing to borrow some extra cash but personal loans and credit cards don’t seem like the right fit, consider these other options.

• Home equity loan: This loan is secured by the equity in your house. It allows homeowners to borrow against the equity in their home to finance renovations or pay for unexpected expenses. When weighing a home equity loan vs. personal loan, compare interest rates and loan terms to see the total cost of borrowing money. Like personal loans, funds are disbursed in a lump-sum payment.
• Home equity line of credit (HELOC): A HELOC is similar to a home equity loan. However, a HELOC is designed as a revolving credit line, much like a credit card. This means they let homeowners borrow as much or as little as they need (from their full loan amount).
• Cash-out refinance: Cash-out refinancing replaces your existing mortgage with a new one that has a higher balance, taking the difference out as cash. You can use that lump sum of money for other purposes, like consolidating debt or home improvements. Payments are based on the total borrowed amount. This can be appealing if you already want to refinance your mortgage, such as to reduce its interest rate.

The bottom line: Choosing a personal loan or credit card depends on your situation

Both personal loans and credit cards can be a good way to borrow money when you’re in a financial pinch. Personal loans offer lump sums up front and lower interest rates, so they can be very helpful for things like consolidating debt or paying a one-time expense. The revolving credit offered by a credit card can be good for people seeking flexibility, but their high rates mean you should avoid using them for long-term financing.

If you’re ready to apply for a personal loan, see if you can get preapproved for one with Rocket Loans℠ today.