Knowing when to delete your personal loan and when to use your credit card will help prevent future financial challenges. Both can help you handle unexpected costs and large purchases, but there are some major differences in how you pay off what you borrow.
If you need to pay in one lump sum to cover your project or pay off your high-profit credit card debt, consider a personal loan. However, credit cards are smaller and are a good option for everyday purchases.
Personal loan vs credit card
Personal loans will provide a lump sum payment, if applicable, minus the origination fee. You will make a fixed monthly payment until your balance is paid. Loans are usually used for large expenses or debt settlement.
Credit cards are revolving credit lines. This means you can repeatedly borrow funds up to a preset threshold called a credit limit. Therefore, it is usually perfect for daily purchases.
The key differences between personal loans and credit cards
When comparing personal loans with credit cards, check out the terms of repayment, interest rates, and how you can access your funds. These are important factors that will help you determine that you are superior in the costs you are paying.
| Personal loan | Credit Card | |
|---|---|---|
| Average interest rate | 12.43% | 20.12% |
| Repayment terms | Usually, you will make a fixed monthly payment for a period set between 12 and 84 months | Pay the minimum or full balance by the monthly due date |
| Types of interest rates | Fixed interest on the whole loan | Variable interest arising from unpaid balances |
| How the funds are paid | Lunch payment: You will receive the full loan amount at once | Revolving Credit Line: Access to credit limits |
| Fee | Origination fees, advance fees, late fees, etc. | Annual fees, late fees, enumeration fees, foreign transaction fees, etc. |
There are many differences between personal loans and credit cards to consider, but there are also some important similarities. Both allow you to borrow money that you have to pay back in monthly installments. Inconsistent or missed payments can undermine your ability to borrow more in the future.
When to use a personal loan
Personal loans typically have lower interest rates than credit cards and are designed for large one-off costs.
It makes the most sense to take out a personal loan when you know you can make monthly payments for the entire term of the loan. You can use a personal loan calculator to estimate payments based on the loan period and interest rate.
Here are some common reasons to take away your personal loan:
- Consolidate high profit obligations.
- Pay unexpected medical expenses.
- Completed housing improvement project.
- Covers wedding costs.
As there is no way to avoid personal loan interest, it is recommended to use your personal loan by the end of the small expenses you can pay from your savings or credit card grace period.
Pros and cons of personal loans
Knowing the pros and cons of personal loans can help you make an informed decision before using this form of funding.
How personal loans affect your credit
Depending on how you use your personal loan, it may have a positive or negative impact on your credit score. When you apply for a loan, you will receive strict inquiries in your credit report. This will reduce your score by up to 10 points. It will remain on your credit report for up to 2 years, but will not affect your score after 12 months.
However, paying off your loan on time can improve your credit score, as 35% of your credit score counts your payment history. By using personal loans to consolidate high-profit debt, you could also reduce your credit usage (which accounts for 30% of your credit score), which could improve your credit in the long term.
People who are best suited to personal loans
If you have good credits to great credits and need to refinance your high-profit debt, it may be wise to use a personal loan. Off on personal loans means the same payment each month and may be available at a lower interest rate than your current obligation. This saves you hundreds or more dollars.
Personal loans can also help you pay for important expenses that you know are not saving enough, such as home renovations and wedding costs. Personal loan interest rates are usually lower than credit card fees, so this is useful if you know exactly how much you need and don’t want to have a balance on your card.
When to use a credit card
Credit cards have a reward system for frequent use, making them suitable for responsible daily spending.
Paying back your credit card balance at the end of the billing cycle is important to maintaining financial health. If you do not pay your balance and your card does not have a 0% adoption period, you will be charged interest. If you only make the minimum payment, you can pay back a long time to what you borrow.
Therefore, you should only use your credit card to be sure you can repay it in a reasonable amount of time.
Here are some ways you can use a credit card:
- Make smaller everyday purchases.
- Pay for a well-planned vacation.
- Earn cashback or travel points.
- Take advantage of opportunities of 0% interest.
On the other hand, credit cards may not be the best idea for paying off loans, making large purchases, or covering expensive, unexpected bills such as medical costs.
Pros and cons of credit cards
If you use it responsibly, a credit card is a great way to earn rewards, cashback and travel perks. However, credit cards can also damage your financial health.
How a credit card affects your credit
Paying your credit card on time each month establishes history that will help you increase your credit score over time. Additionally, if you have a long-established line of credit cards that have been open for several years, your credit score may increase. This is the length of your credit history of 15% of your FICO score. This is especially true if you are maintaining your account consistently in good condition.
However, late payments after 30 days have passed can damage your credit. Also, keeping your card balanced can lead to higher credit usage and lower your credit score. It is generally recommended to keep this ratio below 30% if possible.
Conclusion
Both credit cards and personal loans are useful financial tools that can damage your finances if used recklessly. Before deciding whether your personal loan or credit card is right for you, explore all options and get prequalified to compare prices and rates for each product.
Note that using both is optional. For example, you may decide to get a personal loan for a one-time purchase and use a credit card for your daily expenses.
