Personal Loans vs. Credit Cards: What’s the Difference?

Personal loans give you a lump sum for large purchases. Credit cards work better for smaller, everyday expenses.
Personal Loans vs Credit Cards: What’s the Difference?

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The basic difference between personal loans and credit cards is that personal loans provide a lump sum of money that you pay back each month until your balance reaches zero, while credit cards give you a line of credit and a revolving balance based on your spending.

Deciding when to use a personal loan versus a credit card is a little more nuanced. How much money you need and how quickly you can pay the money back are key factors in deciding which to use.

Think of a personal loan as a good option if you’re getting a large, significant purchase, says Dan Herron, a certified financial planner based in San Luis Obispo, California.

“I look at credit card spending as ‘I’m buying five lattes at Starbucks’ versus going to buy a car or boat or something that’s a little larger in scale,” he says.

A personal loan is a good option when you:

Annual percentage rates on generally range from 6% to 36%. Borrowers with a FICO score of 690 or higher and a low debt-to-income ratio may qualify for a rate at the low end of that range. Borrowing limits can also be high, up to $100,000 for the most qualified borrowers.

A personal loan is an, which means you get money all at once and make fixed monthly payments over a set period, usually two to seven years. Many online lenders let you to see estimated rates, with no impact on your credit score.

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Credit cards are a good option when you:

can be an expensive form of financing if you don’t pay off the balance each month or qualify for a card with a 0% interest promotion. Credit cards typically have double-digit interest rates, and carrying a high balance can negatively impact your credit score.

A credit card is a revolving form of credit that allows repeated access to funds. Instead of getting a lump sum of cash, you can charge up to a certain limit on the credit card. Minimum monthly repayment amounts are usually about 2% of your balance.

With higher rates and the risks of carrying a high balance, credit cards are best reserved for short-term financing and purchases you can pay off in full, like daily expenses and monthly bills.

Getting an or credit card depends mostly on your creditworthiness and finances.

Lenders want to see if you have a history of paying back borrowed money and an ability to do so in the future. They use your credit score and to help measure that.

For both personal loans and credit cards, the better qualified you are, the more options you’re likely to have. Lenders offer low rates and consumer-friendly features to borrowers with good and excellent credit (690 or higher FICO score), so you can compare to see which offers you the best loan. are also reserved for borrowers with high credit scores.

Personal loans and credit cards are most often unsecured. You can use them to pay for almost anything you want.

Because you’re not securing the loan with property, like a house or car, your credit will take the hit if you don’t make on-time payments on the loan or card.

Expect a when you apply for almost any type of credit. This usually causes a temporary drop of a few points.

Personal loan payments usually affect your credit less than credit card payments do, says Herron, the California-based financial planner.

That’s because personal loans have fixed monthly payments that you agree to when you take the loan. Under normal conditions, you don’t have the option to pay a lesser amount. In making on-time payments, you’re doing what you said you’d do.

With a credit card, though, you choose whether you’ll pay the balance in full. Making that choice each month is a good indicator of creditworthiness and has a bigger impact on your score, Herron says.

So while on-time payments toward each will positively affect your score, making your credit card payments could boost it more quickly.

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You can use a debt consolidation loan or a 0% APR balance transfer card to pay down debts. Your circumstances will help you determine which is right.

In both cases, you should be ready to stop accruing debt and focus on repaying it.

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If you have a large amount of debt and need more time to pay it off, a can keep you on track to steadily pay down your debt. A loan is a good option if you can get a lower rate on the loan than what you pay on your existing debt.

If your debt is small enough that you could repay it within a year or so and you have good credit, try a with a 0% APR introductory period.

These cards can help you pay the debt back, interest-free, as long as you repay it within the promotional period, typically 12 to 18 months.

Have a plan to pay off the entire balance before the 0% rate period expires; otherwise, you’ll get hit with double-digit interest rates on your remaining balance.

The savings you net through consolidation should also outweigh balance transfer fees, which typically range between 3% to 5% of the balance, and annual fees.

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