Personal loan vs. credit card: Which should I use?

Back to financial education | Credit cards, | Loans

Photo of a couple on the couch using a credit card while buying airplane tickets on their tablet

July 12, 2024

5 min read

Is a personal loan or a credit card the better choice for your financial needs? Both options allow you to spend now and pay later. Both can be valuable tools when handled responsibly. In this article we’ll look at how personal loans and credit cards work, and when it makes sense to use each one.

Here’s what we’re going to cover:

What is a personal loan?
What is a credit card?
When to use a personal loan
When to use a credit card
Best practices for using credit, no matter the financial product
Oportun: Affordable lending options designed with you in mind

Key takeaways

A personal loan provides you with a lump sum of money. A credit card gives you a line of credit that you can use over and over.
Personal loans can be good choices for home renovation, medical bills, or debt consolidation. Credit cards are often a better option for everyday expenses, travel costs, online shopping, and automatic bill payment.
Whatever credit type you use, keep your spending within your ability to repay.

What is a personal loan?

A personal loan is a sum of money you borrow all at once and then pay back, often in equal payments, over a set period of time. When paid back in installments, you’ll know exactly what you owe each month to assist with budgeting.

A personal loan can be secured, meaning it requires collateral to pay back the loan, or unsecured, meaning collateral is not required. Generally, secured loans have a lower interest rate than unsecured loans because the lender is more confident about being repaid or being able to recover unpaid funds.

What is a credit card?

A credit card provides a revolving line of credit. The money you spend on your credit card is borrowed, and you can borrow any amount up to your credit limit. If you’ve reached your limit, you cannot continue using the card until you’ve paid down the balance.

Maxing out your credit card and your credit score
FICO credit scores use a measurement called amounts of debt, which compares how much you owe to how much you are eligible to borrow. Maxing out your credit card could have a negative impact on your credit score because you’ve used up all that you are able to borrow on that financial product.

Credit cards are most commonly unsecured, though some specialized secured cards exist. Interest rates on credit cards can be high, and the interest can add up quickly if you make only the minimum payment each month. On the flip side, you can avoid paying interest altogether if you pay off your full balance every pay period.

Many credit cards offer rewards such as cash back or travel points.

When to use a personal loan

To decide between a personal loan and a credit card, consider your current finances, the size of the expense, and how soon you can repay what you borrow.

Here are some situations where a personal loan might be a better choice.

Financing home renovations

A personal loan can provide the large sum you need up front for home improvement projects. Get one with a fixed interest rate and set repayment period to help with budgeting for these major expenses.

Paying medical bills

If you’re facing high medical costs, a personal loan could bring you peace of mind. It allows you to pay off your hospital and doctor bills immediately so that you can focus on what’s most important—getting well.

Consolidating debt

Replacing several high-interest debts with a personal loan at a lower interest rate can simplify your finances and help you save money.

Covering major life events

Big events such as weddings or moving to a new home often come with high price tags. A personal loan lets you spread the cost over a longer period of time into manageable payment sizes.

When to use a credit card

Here are some situations where a credit card could be a better option.

Covering everyday expenses

A credit card can be convenient when you’re paying for everyday expenses like groceries and gas. Credit cards give you an easy way to track your spending. The best practice is to pay off your credit card bill so you are only paying face-value for these items, and not paying interest on them.

Booking travel

Many credit cards offer benefits such as travel insurance, airline miles, and hotel points. Using a credit card for travel bookings could earn you perks to enhance these experiences, or protect you in case of unexpected cancellations or delays.

Paying bills automatically

You can set up many bills to be automatically charged to your credit card when they’re due. This way your recurring bills are always paid on time and you don’t have to worry about how much cash is in your bank account until your credit card bill is due.

Shopping online

Online shopping is another area where a credit card can be a great convenience. Be sure to look for websites with a small padlock next to the URL. This means your personal information will be encrypted for better protection.

Best practices for using credit

You work hard for your money, so you’ll want to get the most value from your credit choices. Here are some suggestions.

Make a budget and stick to it

Setting up a realistic budget can help you meet all your expenses and still plan for the future. Budgeting is a smart practice no matter what your income.

Keep spending within your ability to repay

Remember that you have to pay back what you borrow through a loan or credit card, often with interest. Avoid the temptation to buy things you don’t need.

Always make loan payments on time and in full

This is the best way to keep your credit score healthy and show lenders that you know how to handle credit responsibly. If you decide to pay off a personal loan early, check to see that you won’t be charged a penalty for doing so.

Pay off your credit card balance each month

With a credit card, you’ll want to pay off your entire balance each month so that you don’t owe interest. Carrying a credit card balance from one month to the next results in ongoing interest charges that add up quickly and can be difficult to pay back.

Use no more than 30 percent of your credit limit

Using less than 30 percent of your available credit can help build your credit score. If your credit card limit is $2,000, for example, try to keep your spending below $600.

Oportun: Affordable lending options designed with you in mind

Personal loans and credit cards are two financial tools that can help you cover expenses. Whichever option you choose, look closely at the conditions and be sure you understand what you’re agreeing to.

At Oportun, our lending products are designed with you in mind. Visit our homepage to learn about: