Credit Card or Personal Loan: Which is the Best to Use?

Everyone is different. Every situation is different, every financial goal is going to depend on the individual setting the goal. That is why the answer to the question of which is better to use is not so clear-cut. What works for one person in one instance may not be the best solution for another in a different scenario.

Credit Card or Personal Loan: Which is the Best to Use? 1

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A credit card has its uses, and there are practices to their use that can benefit you beyond just being able to make a purchase. The same goes for a personal loan. Using borrowed money can do more for you than you may realize. We are going to take a look at the two options and compare them, helping to make the decision of how to finance your particular situation a little bit easier.

Credit Card

Credit cards are everywhere. Very few businesses in this day and age operate without accepting credit cards as a form of payment. That is one of their benefits – they provide you with flexibility in terms of where you can make a purchase. And they are good for everyday purchases if you prefer not to carry cash with you.

Be careful when doing this, however. Charging too much to your credit card can actually hurt you. Credit cards are good for raising and maintaining your credit score, but only as long as you do not get too close to your credit limit. As a general rule, you would not want to spend more than 30% of your available credit at any one time. This means, out of a $2,000 credit limit, you should stop making purchases on your card after you have spent $600. Your credit utilization is part of your credit score, and going over the 30% mark can reduce your score.

The limits on credit cards are typically smaller when compared to personal loans. While the majority of card limits range between $5,000 – $8,000, your credit score will determine the actual amount available to you. It will also determine the interest rate assigned to your account. The lower your credit score, the more you can expect to pay in finance charges. Keep your score in good standing and you can lower the interest rate on your card.

Personal Loans

Personal loans are a financing option that is widely available but underutilized in society. Because of the accessibility credit cards offer, loans tend not to be considered by the majority of the populous (except in the case of payday loans, but these will be excluded from this discussion because of the controversy surrounding them). Borrowing money from a bank or lending institution can be a great means of funding a large purchase.

Paying for a vacation is one of the top reasons people take out a personal loan. This allows them to take a break from work, and the stresses of everyday life, and live a little. People also use loans to buy new electronics. The cost of TVs and computers nowadays can be rather high, and few can actually pay for them out of pocket. While some may choose to charge these experiences to a credit card, using a loan would be a better option for either of these scenarios.

A personal loan affects your credit score in the same way credit cards do, in that they count towards your credit utilization, so paying them down quickly is preferred to recover the drop you will see in your credit score. However, they give you longer to pay off, and this way you can budget appropriately, without having to worry about a large amount coming out of your next paycheck.

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