Personal Loan vs Credit Card [Differences, Which to Choose]


There will always be those larger purchases that go beyond your monthly budget. Whether for personal purposes like plane tickets for a vacation trip, a new TV for your living room, or immediate needs like hospitalization and home renovation, access to credit facilities always comes in handy.

There are usually two main go-tos for those who need to quickly borrow money: credit cards and personal loans. Both have their advantages and disadvantages, and by the end of this article, you should be able to have some useful insights about your personal loan vs credit card options, as well as know when it’s best to use one over the other.

Personal Loan vs Credit Card

To get a better understanding about the differences between a credit card vs personal loan, it’s best to first know more about what each is and the features that they offer.

What Is a Personal Loan?

Personal loans, also called consumer loans, represent a sum of money given to individuals for a wide variety of purposes which is up to the discretion of the borrower. If you have a variety of loans you juggle, you can also use personal loans for consolidating debt. Before considering this option, you should research the recommended personal loans available to you.

One similarity with a personal loan vs credit card debt is that both are unsecured loans. This means that borrowers do not have to provide collateral as mortgage for the amount of money being loaned. What is issued to secure the lender is a promissory note stating the conditions of the loan which include the loan term and the interest rate.

In choosing a personal loan vs credit card, you’ll have to apply to financial institutions, usually banks. This means getting through the screening process which looks at your essential information that affects your ability to pay. This includes your financial records, income, and credit score. The screening done is a hard credit check which may affect your credit score temporarily. Once you’ve been evaluated, the lender will decide on the terms and interest rate that will be applied. Note also that the amount you’re applying for is also subject to the approval of the lender. It’s always easier to get approved with bigger amounts and more favorable rate loan figures if you have a good or at least above-average credit score and high disposable income. It’s also best to know how to improve your credit score if it’s below average.

There are variations when it comes to paying off your personal loans vs credit cards. But in general, the sum of the entire amount for personal loans is paid in installments each month. Monthly payment consists of both the principal and the interest. Paying period runs through the entire loan term which can be between a few months to even ten years. Missed payments will of course incur penalties.

One of the disadvantages of personal loans vs credits cards is that they can come with higher interest charges as well as other fees that drive up the borrowing cost. Some of the fees that usually come with personal loans include processing fees, origination fees, and prepayment fees.

What Is a Credit Card?

A credit card is a form of credit facility where a lender, usually a bank, issues you a card you can use to pay for goods and services from any credit card accepting merchant. The amount of each purchase will then add up and be charged according to the billing cycle they were made. There is really no restriction to what you can use credit cards for. With regards to credit card utilization vs personal loan, so long as the merchant accepts credit card payments, you can purchase anything within your credit limit.

To apply for a credit card, you’ll also have to go through a screening process. As a standard, you’ll be checked for your ability to pay which means you must have income and a passable credit score. You also don’t need to have any collateral, meaning that’s one thing you don’t have to worry about in regards to the credit card loan vs a personal loan issue. Once you’ve received your credit card, you can already start using it whether through brick and mortar stores or online platforms. The loan you take is on based on each transaction you make with merchants.

Comparing repayments on credit card debt vs personal loan debt, there is no fixed monthly amount that you have to settle. Each monthly bill will contain only the purchases you’ve made for that billing cycle, as well as any past balances and applied interests from previous cycles. There are some credit cards that don’t have interests, but for the majority, having an interest is a standard.

Credit cards are very popular and are even a necessity given the convenience that they offer. Nearly all major establishments accept credit card payments which means you don’t always have to bring cash, especially for larger purchases. Credit card issuers also offer perks for clients such as rebates or discounts for purchases. Some perks can have specific niches like airline miles or movie passes.

With credit card loans having some advantages vs personal loan facilities, credit cards do have some disadvantages also. The most commonly associated con is that those who use them are much more prone to overspend. The flexibility of paying bills may also cause many individuals to mismanage their accounts which end up in ballooning interests. On top of that, there’s also an annual card fee to keep your card active (though not always), as well as a cash advance fee if you’re planning on withdrawing cash from your credit card.

Personal Loan vs Credit Card: How Do They Affect Your Credit Score?

With regards to the differences of personal loan vs credit card facilities and how they have an effect on credit score, here’s what you need to know before inquiring for these services.

Personal loans

Personal loans may briefly affect your credit score as inquiring and taking on a loan lowers your credit score temporarily. This means that while you still have your account outstanding, you might not be able to secure another loan should you need one. However, this can be easily recovered if you’re a good payor. Depending on how well you pay, you can even take this opportunity to treat this like a credit builder loan. Conversely, you’ll damage your credit score if you don’t pay diligently. If you already have a damaged credit score and would like to pursue a personal loan, there are bad credit personal loans you can look into.

Credit card

Applying for a credit card vs a personal loan both affects your credit score. While an initial application requires only a soft inquiry from banks, hard inquiry, which lowers credit score, is needed before any lender approves your credit card application. The longer you’ve had your card, the better it is for your credit score. This is of course given that you’ve always been very diligent in making your monthly payments. Opening more credit card accounts does temporarily lower your credit score, but on the positive side, it increases your available credit which should help lower your credit utilization rate.

Loan alternatives

If you’re choosing between a personal loan vs a credit card, you might also want to look into some of the alternative loan facilities that may be the better choice based on your situation.

Home equity loan

If you’ve been paying for your home loan for quite a while now, chances are that you already have a portion of equity for the value that you’ve already paid. This equity can then be used as a mortgage in case you’d want to borrow more money for other needs. You can expect the interest that will be applied on your home equity loan to be higher than the interest applied on your original home loan. This is because the original lender has priority over the property should you default payment which puts the home equity lender at a higher risk. Nonetheless, access to the best home equity loans facility should give better opportunities to fill in your financial needs.

Cash-out refinance

Another type of loan you can consider as an alternative in order to avoid the loan on credit card vs personal loan indeciseveness is cash-out refinance. In this facility, the lender will loan you up to 80% of the value of your home. The basis for the value shall be appraised to the current market value of the property which takes advantage of any gains you may have since the time of purchase of your home. Upon approval, you’ll then have to pay your existing mortgage first and use the rest for any purpose as you please.

Home equity line of credit

Similar to a home equity loan, a home equity line of credit (HELOC) uses the value of your already paid portion of your home as basis for how much a lender can give you. However, a key difference between a HELOC and home equity loan is that the former gives you access to revolving credit rather than a one time cash handout, much like a credit card loan vs personal loan. Meaning, you can borrow only what you need and when you need as long as you don’t exceed the allowable credit card limit. Since this is a revolving credit, there’s also flexibility in repayments where you can borrow and return as you see fit.

Compare Credit Card vs Personal Loan

Both personal loans and credit cards are great facilities you should have access to for those times when you need to make payments that are beyond your budget for monthly or daily expenses. Both are applied for through lenders, usually banks, and both have their own conditions as to the terms and rates of the service. Both also affect credit scores upon application, but through diligent repayments, can also increase credit score. With certain similarities also come their differences as well as pros and cons relative to each other.

Here are some pointers about credit card debt vs personal loan and which is better in certain situations. When it comes to loan principal, personal loans give you a one-time release of the approved borrowed amount. You definitely have to know from the beginning how much you need to loan as the total amount approved will be given to you only once. On the other hand, a credit card is a standby credit that you can get access to when you need to make a purchase.


With regards to personal loans vs credit cards for repayments, personal loans have fixed payment schemes where you have a monthly figure you have to pay until the end of your loan term. Lenders usually won’t let you repay the loan ahead of schedule as they’ll charge a prepayment fee for paying in advance. For credit cards, you can set your own pace of when and how much you’d like to pay, whether you’d like to pay faster or take your time until you have more free cash to pay in bulk. This is always in consideration that you have to satisfy the minimum requirement each month.


Another contrast between a personal loan vs credit card is that with personal loans, you are given access to money which you can use as cash. When making a purchase, you have the option to use cash, cheque, or online transfer, which lets you make transactions with any institution or person that accepts legal tender. You are not always able to do this with credit cards as credit card use requires a credit card terminal. This sets a limitation as you can’t pay through credit card to anyone who does not have this device. Since credit card terminals are usually reserved for businesses, you won’t be able to make payments or transfer money to persons or individuals as easily.

When to Use Personal Loans and When to Use Credit Cards

Knowing the differences between personal loans vs credit cards should help you decide which to use, and when to use them. If you already know how much you need and you need that lump sum amount to be released to you as a whole, then we recommend taking on a personal loan. If you only need standby credit readily available anytime for various smaller purchases or few big ones which you’d want to be able to pay off whenever you can, using a credit card is the better option.


How much does personal loan lower your credit score vs credit card debts?

Both personal loans and credit cards affect your credit score starting with application since both require hard credit checks prior to approval. When it comes to increasing your credit score, the stiff, fixed payment routine from a personal loan may be disadvantageous in case you miss payments which can affect credit score. A credit card’s flexible repayments scheme gives you a little more leeway for those few times you can’t make payments in full.

Does it hurt more to have a personal loan vs credit card loans when buying a house?

Both personal loans and credit cards can be used when buying a house, given that you can get approved for such huge amounts on both facilities. If you’re buying a house using a home loan, a fully utilized personal loan may put you at a disadvantage for getting a home loan approved. Credit cards on the other hand can be paid immediately in full which lets you free up credit.

How is interest charged in a credit card vs a personal loan?

Interests are charged differently in a personal loan vs credit card. For credit cards, only the unpaid portion of the billing cycle is charged with interest. This charge is reflected in the next billing cycles and covers the balance left from the previous cycle. For personal loans, interest is charged based on the total amount of loan and the length of the term. Payment for the interest is done as monthly installments along with payments for the principal.


I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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