Personal loan or a credit card: Which is right for me?

Peter Warden
Peter Warden
The Mortgage Reports Editor
August 15, 2019 - 3 min read

Should you use a personal loan or a credit card?

Choosing between a personal loan or a credit card is a bit of a no-brainer.

Credit cards are great for paying for things (they’re by far the safest payment method) and lousy for borrowing.

Personal loans are great for borrowing. But you’ll struggle to get a store clerk to accept your loan agreement at a till.

And that’s it. Well, almost. Let’s explore a few exceptions.

When your card charges 0% APR

Maybe you have a shiny new balance-transfer credit card that offers you a 0% APR for an introductory period. And perhaps it’s one of those that let you (they don’t all) charge new purchases at that rate.

Personal loans may have affordable rates. But they can’t compete with that.

However, you still need to take care when charging to that card. Ask yourself:

  • Will I definitely have zeroed my balance by the time the introductory offer ends? Otherwise, a high “go-to” rate will kick in
  • Does my card still allow me to make purchases? Some restrict the period during which those can be made while still getting the 0% rate
  • Am I sure I’m going to pay on time every month? If you’re late or otherwise breach the agreement, your 0% deal is likely to evaporate in moments

Those 0% deals can be great. But don’t let them dazzle you. Credit card companies offer them because they hope you’ll end up paying high rates later.

Personal Loan or a Balance Transfer: Which is Right for Me?

When it’s only a little over a short time

Suppose you want to buy something for a few hundred dollars. And you know you’ll pay that down over a few months.

Even with the sky-high rates most card issuers charge, the interest you pay isn’t going to break the bank. Personal loans are typically better when you want to borrow larger sums (up to $100,000!) over 1-5 years.

Everything you need to know about personal loans

But NOT when you’re going to hurt your credit score.

Too few people realize that they hurt their credit scores when they borrow big on their plastic. If your balance is over 30% of your credit limit, you’re harming your score. And that (it’s called your “credit utilization ratio”) applies both to each individual card and all your limits and balances taken together.

So don’t charge anything to your card that’s going to breach that 30% ceiling. Or, at least, don’t do so unless you’re going to pay down enough that month to keep your score safe.

Even then, there’s a risk your payment won’t have cleared on the day your card company reports to the Big 3 credit bureaus. So you might want to send your payment early.

*TheMortgageReports and/or our partners are currently unable to service the following states - MA, NV

Play your cards right

If that last section was a bit of a shock, you may not be using your cards strategically. Good money managers tend to zero their balances every month.

That way, their credit utilization is rarely an issue. And it also saves them a fortune in interest charges.

Consider debt consolidation

Would you like to be like them? If so, you might be a candidate for debt consolidation. You take a single personal loan that’s big enough to pay down completely all your card balances — and maybe other scrappy little debts you have lying around.

You might be better off in many ways:

  1. Your credit score is safe — That 30% credit utilization rule doesn’t apply to personal loans
  2. You make just one debt payment a month — Any balances on your cards don’t count as debt as long as you zero them each month
  3. It’s likely you’ll make savings — Your personal loan rate would typically be way lower than your cards’ rates
  4. You’ll know exactly when you’ll be debt-free — Personal loans have fixed terms, usually of 1-5 years. And you can’t drag them out by making card-style minimum payments
  5. Budgeting is simple — With personal loans, payments vary only with changes to wider interest rates. And for 100% predictability, you can opt for a fixed-rate loan. So every payment is the same as the first

Sounds good? Read more:

How to use a personal loan for debt consolidation

Use a personal loan or a credit card? No. Use both

Don’t think of these products as alternatives. They’re more powerful when used together. So the question isn’t one of choosing between a personal loan or a credit card. It’s about using a personal loan and a credit card.

We mentioned earlier that credit cards are the safest way to pay for things. They have more statutory protections than debit cards, checks, cash, prepaid cards, Bitcoin or anything else.

Better when it’s not your money at stake

True, banks say they voluntarily provide similar protections on debit cards. But a debit card sees money go straight out from your bank account. A rogue credit card payment goes out of the card company’s account — at least until you pay it.

See the difference? Banks are likely to take their sweet time getting your money back. Card issuers’ minds are more concentrated when it’s their money at stake.

So, by all means, use your credit cards for as many payments as possible. Heck, you might get miles, points or cash back, too.

Borrow smart

But don’t use your plastic to borrow. That’s almost bound to be way more expensive than a personal loan.

When you want something expensive, first borrow using a personal loan. Whether it’s a vacation, a home theater system, a celebration party, an upscale laptop or a new wardrobe, that’s the smart move.

Just pay for the purchase on your credit card. And then zero your balance using the proceeds of your personal loan.

*TheMortgageReports and/or our partners are currently unable to service the following states - MA, NV

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