
Personal Loan vs. Credit Card Pros and Cons
Personal Loan | Credit Card | |
Interest Rates | Usually Lower | Usually Higher |
Ease of Acquisition | More Difficult | Less Difficult |
Credit Type | Lump-Sum | Rolling Credit |
Best For | Borrowing Large Amounts | Acquiring Benefits |
What Bearing Does Personal Loan vs. Credit Card Have on Credit Score?
Your credit score, in general, is a brief snapshot representing your ability to borrow money and pay it back on time. Ultimately, this score will affect many components of your financial well-being, including the interest rates you’ll pay for credit cards v personal loans and even whether you’ll be able to do things such as qualify for a mortgage. In almost all cases, any personal loan or credit card you obtain will impact your credit score. At the beginning of the application process, lenders might conduct a “hard inquiry,” which will (temporarily) knock your score down by a few points. However, whether a credit card or personal loan will affect your credit score, in the long run, will depend on whether you make your payments as planned. There are five primary components of your credit score: payment history, the amount owed, length of history, credit mix, and new credit. Once you open a new account, your score will temporarily drop. But if you can keep making payments in full and on time, and even get ahead with payments when possible, your score will improve and might even end up better than it was before applying for new debt.Personal Loans vs. Credit Cards for Debt Consolidation
Debt consolidation is a process that involves taking multiple sources of debt and turning them into a single (or at least fewer) source of debt—often at a discount. There are numerous ways to consolidate debt, including using both new personal loans and credit cards. When comparing credit card consolidation vs. personal loan consolidation, there are several things you’ll want to keep in mind. In general, personal loans are better for larger amounts of debt. At the same time, credit cards might be more effective for consolidating smaller debts, especially if these debts came from other higher interest rate cards. You should also consider your expected payback period, the available interest rates, and whether you’ve exhausted existing lines of credit.Credit Card vs. Personal Loan: Which Should You Use
Whether a credit card or personal loan will make the most sense for you will depend on several variables—the answer that makes the most sense for one person might not make the most sense for another. Start by taking a close look at your personal finances, including summarizing all existing accounts, looking at your interest rates, and clearly defining your long-term financial goals. Generally speaking, personal loans are ideal for people who need to borrow a large amount and want to manage their debt payback over time efficiently. Personal loans are often for specific uses, such as home improvements, vacations, or starting a business. Interest rates are typically lower, though, depending on your credit score. Credit cards are better for paying for smaller debts. If you can pay down your credit card balance every month, you can effectively borrow money interest-free while earning certain benefits.Conclusion
Debt is helpful for many things, and it also comes in many forms. Both personal loans and credit cards, when used responsibly, can help you achieve your general financial goals. Whether you use a credit card to rack up some airline points to cash in before your next vacation or a personal loan to consolidate several other high-interest debts, using both can be advantageous in the long run. Just be sure to explore all options available before making any final commitments.Article Topics