Know When to Use Credit Cards vs. Personal Loans

3 min read

Posted on October 20, 2021

Man uses credit card to make online purchase.

Reasons to get a personal loan or a credit card can vary, but they are very different ways to borrow money. You can use a personal loan to pay off a credit card or consolidate debt, as this loan provides you with a lump sum of cash. A credit card, on the other hand, allows you to make purchases up to your maximum credit limit.

When used properly, both credit cards and personal loans can help you accomplish your goals. When used without discretion, though, these forms of debt may get you into financial trouble.

Let’s talk about when it’s a good idea and when it’s a bad idea to use a credit card or a personal loan.

When to Use a Credit Card

Many of us have experienced being offered a credit card when making a purchase. The cashier – or automated online assistant – tells us that if we quickly sign up for a credit card, we can get 20% off our first purchase. While this can be a tempting offer, it’s not a good idea to accept a line of credit without first taking the time to understand it.

Credit cards often have high interest rates. According to U.S. News & World Report, the average consumer credit card interest rate ranges from 15.56% to 22.87% APR.

The best time to use a credit card is when you know that you are capable of paying your balance in full every month. Using a credit card successfully requires both the money to afford your purchases and the self-control to buy only what you can afford.

Credit Cards Can Have Benefits

The great thing about credit cards is that they don’t put you on the hook for the full line of credit immediately. For example, you might get a credit card with a $4,000 limit but only use it to make one purchase for $400. As long as you pay off your balance before it starts collecting interest, your credit card could:

  • Help you qualify for more credit
  • Earn rewards

If you do end up holding a balance on your credit card, your monthly minimum payment is usually low compared to a personal loan monthly payment. But if you only pay the minimum payment each month, you will end up paying more in interest, making the cost of borrowing the money more expensive.

When to Use a Personal Loan

Taking out a personal loan is usually a bigger decision than getting a new credit card. Once you agree to borrow the money with a personal loan, you could receive it as a lump sum of cash in your designated bank account. There are some great reasons to take out a personal loan, such as debt consolidation. In fact, many people use personal loans to pay off credit cards at a higher interest rate. Here are some of the benefits of using a personal loan for debt consolidation:

  • You could lower the overall interest rate you’re paying.
  • You could consolidate several bills into one monthly payment.

Other Ways a Personal Loan Can Be Used

A personal loan can be used for other things besides debt consolidation. Home improvements, for example, are a popular use for personal loans. Many borrowers find that using a personal loan to upgrade their home, not only makes their living quarters nicer, but could also add value to their property.

Personal loans can be used for large or unexpected purchases, too. If you need to repair your car or you were recently hit with a huge medical bill, a personal loan may help get you on your feet.

At Splash Financial, we work with a variety of different lending partners that offer competitive personal loans for qualified borrowers. If you are considering a personal loan, explore your options through Splash.


The information provided in this blog post is not intended to provide legal, financial or tax advice. We recommend consulting with a financial adviser before making a major financial decision.

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