Woman holding credit card and phone, comparing loan options.

Personal Loan Vs. Credit Card

5-Minute Read


It’s always ideal to have cash on hand for purchases, but life happens. Maybe you need to pay off that overdue medical bill or make some repairs to get your car back on the road. If you’re in a bind, you might find yourself considering taking out a personal loan. In most cases, personal loans are an inexpensive and reliable way to get cash fast. But, credit cards also have similar benefits.

Not sure of the best choice for your specific needs? Keep reading to explore personal loans vs. credit cards, including which option could be better for you.

Personal Loan Compared To A Credit Card

Both personal loans and credit cards allow you to borrow a predetermined amount of money that you pay off over time. Borrowers can usually use money loaned for almost any purpose – consolidate high interest debt, pay off medical bills or a major home repair. The main differences boil down to repayment plans and how you borrow the cash.

A personal loan typically offers you a fixed amount which you receive in a lump sum when your application gets approved. You pay back the loan in monthly installments for the agreed upon term – it’s typically the same amount each month because you’re offered a fixed interest rate. Lenders consider your account closed once you pay off your loan, and you’ll need to submit another application if you want to borrow more money.

Lenders consider a credit card as revolving debt – you get a line of credit where you can borrow money up to a certain limit as often as you want. You can pay the entirety of the balance each billing cycle or carry a balance and pay interest. As long as the amount you want to borrow is under your credit limit, you can keep using your card for an indefinite period of time – there’s no set time you need to pay down your balance.

Both personal loans and credit cards can result in unsecured or secured debt. When you take out an unsecured loan, it means that the creditor qualifies you based on your creditworthiness, or ability to pay back the loan on time. Secured debt, on the other hand, means you need to back your loan with collateral – like a car or money down – so that lenders can minimize some of the risk associated with loaning you money.

Often, a personal loan has a lower interest rate than credit cards. Those with excellent credit may qualify for a credit card with an introductory 0% APR for a specified amount of time, typically 12 to 18 months.

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Which Is Better, Credit Cards Or Personal Loans?

There is no definitive answer as to which type works better for you or your situation. Personal loans and credit cards both have their own benefits and drawbacks, all of which should be taken into consideration before making a commitment. However, there are certain circumstances by which it makes sense to choose a personal loan over a credit card and vice versa. Let’s break down what each option brings to the table.

Personal Loans

Personal loans are best for those who:

  • Have many high-interest loans and want to combine them
  • Require lots of capital to finance a large cost
  • Have a decent credit score
  • Have the ability to keep up with fixed, monthly payments

Borrowers with good to excellent credit tend to get better rates, so check your score to understand what you might qualify for and what actions you may need to take to rebuild your score. You can also prequalify for a personal loan to look at payment estimates without affecting your credit score. 

Apart from a good credit score, lenders also look at factors such as your individual income and your ability to pay back another loan. If you’re self-employed, you might need to pass a few more hurdles during the application process before you can get approved. Depending on the lender, you may need to pay a certain amount of money (known as an origination fee) to take out the loan, and possibly another fee if you decided to pay back your loan early (known as a prepayment penalty or fee). There are no pre-payment penalties at Rocket Loans, giving you more flexibility to repay the way you want.

Credit Cards

Credit cards are best for those who:

  • Have a decent credit score or history – you can get a secured credit card if you don’t have a credit history
  • Want a more flexible payment option since you can pay the minimum or the entire balance at the end of each billing cycle (but it’s best to pay all you can)
  • Want to borrow a small amount of money
  • Are interested in earning rewards like cash back or points toward travel

One unique feature is that those with excellent credit can qualify for rewards credit cards or cards that offer a 0% introductory APR – allowing them to pay down their debt interest-free as long as they do so within the card’s specified period.

However, with a credit card, you generally can’t borrow as much as you can with a personal loan, and you may not end up using your credit card in all instances to finance purchases. You could also find yourself paying much higher interest rates if you choose to carry over balances month to month, including annual fees for simply the privilege of owning the card.

Credit Card Vs. Personal Loan Interest

Both personal loans and credit cards can be used to pay off credit card debt, so you can get out of debt faster by saving money on interest. How you pay interest will also vary for each.

It can make sense to use another credit card to pay off your existing balance if you have a small amount of debt, excellent credit and your credit card doesn’t charge annual fees. It means you have the opportunity to qualify for a card offering a 0% introductory offer, meaning you can pay off your debt interest-free if you do so within a specified amount of time.

For example, say you have $5,000 on an existing card charging 20% APR. You decide to open a credit card with a 0% APR for the first 12 months and transfer your $5,000 balance to this new card. This means you don’t have to pay interest on your existing balance for the next 12 months instead of paying 20% with your credit card.

Keep in mind that conducting a balance transfer subjects you to fees, so you should see if it’s worth paying those before making the jump. You’ll also want to have a personal plan to pay your balance in its entirety before the introductory period is over, or you’ll be paying interest again.

Personal loans are a better idea if you have a lot of debt to pay off that’s more than what you can put on a credit card, especially if you need more than a year to pay it off. You can take out a debt consolidation loan with more affordable fixed monthly payments, and possibly with a lower rate than what you’re paying on a card.

Remember To Do Your Research

Choosing between a personal loan and a credit card is not as easy as it looks, though either can give you a much-needed buffer when you’re in a bind.

When making your decision, do your due diligence and understand the consequences of either choice. This includes shopping around for the best rates and repayment terms for your specific credit score. At Rocket Loans, we let you check out your personalized loan offers without it affecting your credit score. Consider using free tools like those offered at Rocket Homes to find out what your score is and how your credit can affect what you may qualify for.

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