Credit cards and loans can help you manage both long-term debts and short-term finances. However, it can take time to pick the right one for you.
So, which option should you go for?
The pros of using a credit card
People use credit cards for different reasons, as they have several advantages.
Improving credit score
Paying back your credit card regularly and on time can help improve your credit score. For example, banks design credit builder cards to help you with this.
Purchase protection
You'll get protection for certain purchases with a credit card under Section 75 of the Consumer Credit Act.
For example, if you bought a smartphone online with your credit card and it never arrived because the company went bust, you could get a refund under Section 75.
Helps with managing debt
Using a credit card can sometimes help manage debts. However, it's not always suitable, so read our guide on the ins and outs of paying off a loan with one.
Managing interest
People sometimes move credit card debt from one card to another with 0% interest. We recommend speaking to a qualified financial adviser before doing this.
You can find one through the Personal Finance Society.
Preparing for emergencies
It can help to have money available for emergencies. However, you should only use it for purchases you know you can pay back.
Making payments abroad
Using certain credit cards in a foreign country can charge low to no fees, so they can be a good option for spending money abroad.
The cons of using a credit card
For all their advantages, there are a few downsides of credit cards you should know about.
Increasing your debt
Debt can happen if you use a credit card with unaffordable interest rates, can't keep up with monthly payments or can't pay off the balance during the 0% interest-free period.
Get support if you need help managing your debt.
Decreasing your credit score
While using a credit card can increase your score, missing repayments could lower it. Not paying back on time impacts your chances of acceptance for loans and other types of borrowing.
Learn more about credit scores.
Higher interest rates than loans
Credit cards can have higher interest on borrowing compared to loans. Sometimes, the interest can increase to unaffordable levels, meaning you won’t be able to make your repayments or could pay back significantly more than needed.
Credit card fees
Credit card companies have fees for things like going over your credit limit or balance transfers. Read the terms and conditions of your credit card agreement to avoid getting charged unnecessary fees.
Getting charged for taking out cash
Most credit card providers charge you for withdrawing money. If you can, taking out cash using a different method may be a cheaper option.
The pros of a personal loan
Personal loans can be beneficial in a few ways.
Fund larger purchases
A personal loan allows you to borrow more money, meaning you can use it on purchases like a car. You pay this back over time, which makes some purchases easier to manage.
Some have lower interest rates
Some loans have comparatively lower interest rates, especially compared to credit cards. Having a lower interest rate means you pay less back over time.
However, this isn't always the case, so follow independent advice first.
Flexible spending
You can use an unsecured personal loan for many purposes, such as to buy a car or renovate your home.
It helps build credit
Paying back a loan and not missing payments can increase your credit score, which can improve your chances of getting accepted for borrowing in future.
The cons of a personal loan
Personal loans can also come with some risky drawbacks.
Loan fees
Loans have various fees if you break the terms and conditions. For example, some may have an early repayment fee, while others may charge you for missing payments.
For this reason, it's important to get independent advice before accepting a loan.
High interest
Some loans have a high Annual Percentage Rate (APR). A higher APR means you'll need to pay more interest, so always review this before accepting a loan.
Impact on your credit score
Failing to pay your loan back on time will negatively impact your credit score, which can be difficult to restore.
When should you consider applying for a credit card?
You’d usually get a credit card for:
- small, unexpected purchases
- transferring debts at a cheaper rate
- improving your credit score
- earning cashback and rewards
- getting extra protection for purchases
When should you consider applying for a personal loan?
You’d normally use a personal loan for:
- larger, expected purchases
- debt consolidation
- upgrading your home
- buying a car
- improving your credit score
Personal loan vs credit card: which one is right for you?
This usually depends on what you need to borrow money for and for how long.
Personal loans suit bigger expenses more and can offer a better interest rate than a credit card. You'll also get the money relatively quickly and know how much to pay monthly.
What's more, a loan can help to consolidate your debts or make a larger purchase.
On the other hand, credit cards could be more cost-effective for small purchases you wish to repay over a short period of time or within an interest free period.
You'll get different offers for loans and credit cards, so always take the advice of an independent financial advisor to make sure you get the right deal for you.
