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Credit cards provide a line of credit that you can use to make purchases and pay back over time, while loans provide a lump sum of money that you repay with interest over a set period. Each option comes with its own pros and cons.

According to Experian’s State of Credit report, the average U.S. consumer holds about 2 bank-issued credit cards and carries a total balance of $5,551. With so many options available for borrowing money, it can be challenging to determine the best option for your financial needs. In this article, we will compare the benefits and drawbacks of using a credit card versus taking out a loan, and offer tips for managing debt and improving your credit score.


How Does A Credit Card Compare To Getting A Loan?


Both options allow you to borrow money but they come with some key differences including the following:



Credit cards offer more flexibility than loans. Credit cards allow you to make purchases as needed and pay them off over time. 

Loans, on the other hand, are typically taken out for a specific purpose and have a set repayment schedule. If you do not stick to this stricter repayment schedule this can negatively affect your credit score.


Repayment Terms

Credit cards typically have minimum monthly payments, but you can pay amounts above the minimum to reduce your balance and interest charges. Loans, however, have fixed repayment terms. This means you will need to make the agreed-upon payments each month until the loan is fully paid off.


Interest Rates

Credit card interest rates are generally higher than loan interest rates. This means you will typically end up paying more than you would if you had taken out a loan, in total.


Credit Utilization

Credit card utilization refers to the amount of credit you use compared to your credit limit, with high credit utilization meaning you are using amounts higher than your credit limit. High credit utilization can negatively impact your credit score. 

With a loan, you are borrowing a specific amount and paying it back over time, so credit utilization is not a factor. 


Credit History

Both credit cards and loans can impact your credit history and credit score rating either positively or negatively. 




Which Is Better, A Credit Card Or A Loan?


This will depend on your financial situation and needs. If you need to make regular purchases or have an ongoing need for credit, a credit card may be a good choice whereas if you want to make a large purchase or consolidate debt, a loan may be a better option. However, it is not so simple and you should also consider a whole range of additional factors such as interest rates, repayment terms and any fees associated with each option to make an informed decision.


What Are The Risks Of Using A Credit Card Or Taking Out A Loan?


The risks associated with using credit cards and taking out loans include the following:

  • Debt accumulation: If you cannot pay off your credit card or loan balance in full, you can accumulate debt and incur high interest charges.
  • Credit damage: Late payments or defaulting on a loan or credit card can damage your credit score. A low credit score will make it harder to obtain credit in the future.
  • Fees and penalties: Credit cards and loans often come with fees and penalties, such as annual fees, late payment fees or prepayment penalties, that can add up over time. Read the fine print to understand the fees and penalties before borrowing money.


What Should I Consider Before Applying For A Credit Card Or Loan?


Before applying for any type of credit, try to consider your current financial situation and whether you will be able to make the required payments. You should also compare interest rates, fees, and repayment terms to find the best option for your needs. Additionally, make sure to check your credit score and history to ensure you will be eligible for the product you want.


What Are The Benefits Of Using A Credit Card?


Credit cards offer several benefits including convenience. Credit cards are accepted at most merchants, making it easy to make purchases without carrying cash. They are also great for credit building, if used responsibly. By consistently paying off your credit card bills, your credit score will improve over time..

Many people use credit cards for the purchase protection they can offer, including extended warranties, fraud protection and price protection. This can help users save money and protect their purchases.

Plenty of credit cards also offer rewards programs, such as cashback, points or miles. These rewards are given to credit card users who make a certain amount of purchases using their card.


What Are The Benefits Of Getting A Loan?


Loans typically have lower interest rates than credit cards, making them a more cost-effective way to borrow money. They also have fixed repayment terms, which can make it easier to budget and plan for payments despite the loss of flexibility.

Additionally, loans typically have longer repayment terms than credit cards, which can help make payments more affordable than credit card debt. Loans can be used to consolidate high-interest debt into a single payment with a lower interest rate.

get a loan


How Can I Use A Credit Card Or Loan Responsibly?


To use a credit card or loan responsibly, try and stick to the following suggestions:

  • Only borrow what you can afford to pay back.
  • Make payments on time and in full each month to avoid interest charges.
  • Keep credit card balances low to maintain a low credit utilization ratio (meaning you use amounts less than your limit).
  • Check your credit score and credit reports regularly to ensure there are no errors.
  • Read the terms and conditions to understand any fees or penalties.
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Justine Gray

Justine Gray is a contributor to Pheabs, sharing more than 10 years of experience in the consumer finance industry across the US. Follow her guides for financial advice, money saving tips and more. Follow them on Linkedin and Youtube.