Skip to main content

Should I get a credit card or a loan?

Should I get a credit card or a loan image

The choice between a credit card and a loan comes down to whichever fits your personal circumstances. 

This often depends on your credit rating and how much you can pay back over a period of time. Credit cards may be better for smaller purchases too, where you can leverage a 0% promotional scheme and pay off the sum before any interest kicks in. Loans may be more suited to a larger purchase, where you know you’ll need more time to pay off the amount.

How do credit cards work?

A credit card is essentially a way of borrowing money and paying it back at a later date. Most credit cards come with an interest free period. These periods can vary, meaning that you can spend money and pay back that exact same amount if the balance is cleared before the end of that period.

Once the interest free period expires, the amount you borrow will incur interest charges which will vary from card to card. For those with a poor credit history, interest rates tend to be higher but if you do have poor credit, you may only be eligible for a credit builder card.

Lenders will give you a credit limit once you are accepted for a credit card, and again these amounts vary. The limit is determined through a complex process known as underwriting. There are a number of factors that are used to determine your credit limit, but they are usually based on factors such as your previous credit history and personal circumstances.

Credit cards are an excellent way to borrow money as long as you use them responsibly and service the debt on or before the payment due date. Using them in this way can actually have a positive effect on your credit score as it shows potential lenders that you can manage your finances well and repay the debt on a regular basis.

However, credit cards can attract high interest rates once the interest free period comes to an end. They can also attract late fees for missed payments and this can have serious implications on your credit score.

 

How do loans work?

Loans are available as both long and short-term solutions to borrowing money for large purchases, to consolidate any existing debt you may have or for any emergencies, should you need quick access to funds. If you are accepted for the loan, you will start to make regular payments on a date agreed between yourself and the lender, so that over the agreed time period, you pay back the amount in full.

This is how the process works:

  1. Your first step should be an eligibility checker, like our moneymatcher, to see what cards or loans you would most likely be accepted for. See here for our Loans eligibility checker and here for our Credit Card eligibility checker
  2. You will apply for the card or loan of your choice, filling in all the relevant information so that the lender can verify your identity and assess your suitability.
  3. A decision will be made.
  4. The card or loan will be sent or paid to your account if you are accepted.
  5. You will be given a repayment schedule and expected to keep up with repayments in accordance with this.

There are several different types of loans and credit cards available including personal loans, business loans, short term loans, car loans, purchase cards, balance transfer cards, cashback cards or credit cards that allow you to collect air miles. The right loan or credit card product will depend on your personal circumstances and what the money is going to be used for.

When is a credit card better than a loan?

Deciding whether to opt for a credit card or loan is very much dependant on your current circumstances, your credit history, the required repayment term and what you are actually borrowing the money for.

It’s up to you to decide which of these financial products works best for you, but here’s a few pros and cons of loans and credit cards to give you a better idea which may offer the best solution for you.

 

Credit Cards   Loans  
Pros Cons Pros Cons
Credit cards can come with 0% interest periods which means you can borrow fee free. Interest amounts can soon mount up if the debt is not cleared before the interest free period ends, often leaving you worse off. If you fail to meet the payment schedule you also risk losing the promotional offer. You can usually borrow larger amounts with a loan than a card, so they are more useful when it comes to making a higher value purchase. If the loan amount is relatively small, the interest rates are generally much higher so it can be expensive.
Consumer protection is extensive when taking out a credit card. Low minimum payments mean that it can take a long time to repay the debt in full, so you’ll be in debt and making payments for longer. A longer repayment term means that you can spread the cost of a loan from just a few months to several years, allowing you to juggle finances more freely. If you decide to pay your loan off early, you may face penalty fees for doing so which makes the overall loan that much more costly.
Certain credit cards allow you to transfer funds directly into your bank account for ease of access and immediate use. Interest rates can be much higher for customers with a poor credit rating so it’s often an expensive way to access cash in the long term. With a loan, you agree an amount in advance rather than being offered a credit limit with a credit card so you always know if it’s suitable and how much you’ll pay back. There are no interest free periods available on loans, so you’ll start to accumulate interest payments from the minute the funds are delivered.
Some credit cards come with voucher bonuses or other incentives which gives you a little more for your money – especially if you needed the card anyway. Low credit limits mean that credit cards aren’t usually much use for large purchases such as a new kitchen or car. The loan APR may be more favourable if you have a good credit score, so it can be an affordable way to borrow money – as long as you have been sensible previously. If you have a poor credit score, you may be hit with a high APR.

When is a personal loan better than a credit card?

Personal loans are an excellent method of borrowing money, but choosing a loan over a credit card depends on your personal circumstances.

Below are a few scenarios where it may be wise to choose a loan over a credit card:

Making a large purchase

If you wish to make a large purchase such as a car or carry out improvements to your home, a personal loan is a good way of securing larger amounts of money – much more so than a credit card. However, it’s best to check as there are some 0% credit cards available for 2 years, sometimes more, that could allow you a good period of time to pay off a large amount with 0% interest. If you know you can definitely make payments each month and pay off the total amount before the interest kicks in, then this could be the better option.

You want a fixed repayment amount

For those of us that like better control of our finances, having a fixed repayment amount each month rather than an amount that can vary (like a credit card repayment) a loan is a good choice. Loans are a good way to keep to a monthly budget whilst repaying the debt.

Need longer to repay the debt

Having longer to repay a large balance is useful, especially for those large purchases we mentioned earlier. Loan repayment terms can vary from just a few months to several years and are ideal if you need longer to repay the debt.

Have a good credit rating

Individuals with a good credit rating will often be offered more favourable rates by many lenders on loans, so it’s a good way of cutting down the interest repaid if you have a solid credit history.

 

View and compare personal loans

View and compare cards