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What are the Differences Between Personal Loans and Credit Cards?

5 min read

Last Updated: February 13, 2025

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Key Takeaways

Both personal loans and credit cards impact your credit history, so it’s important to stay on top of payments.
While credit cards offer a personal line of credit that you could use as needed, personal loans pay out one lump sum.
A credit card may work best for everyday expenses, while a personal loan could help you cover a specific purchase.

Most people need to borrow money at some point, whether they have an emergency expense or just need a little extra cash-flow flexibility. Credit cards and personal loans could each help bridge the gap. But when the need arises, how do you choose? Understanding the differences between the two financial tools could help you make the best decision for your wallet and your life.

Comparing credit cards to personal loans

Because credit cards and personal loans allow you to borrow money from an institution, they’re both credit. However, they’re different types of credit with unique applications.

Similarities of personal loans and credit cards

You may notice some overlap as you compare credit cards and personal loans. Lenders typically check each applicant’s credit report to determine their creditworthiness for each.

Responsible use and timely payments are vital whether you use a personal loan or a credit card. That’s because your payment history and credit utilization are key in determining your credit score. Missed payments and unmanageable debt could quickly hurt your credit score.

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Financial laws regulate both credit cards and personal loans. These regulations restrict unfair lending practices from banks, credit unions, and other lenders.

Both types of credit are flexible. While a tool like a home loan or business loan may only cover specific costs, you could use credit cards or personal loans for most purchases.

Differences between credit cards and personal loans

A personal loan is an installment loan. When a lender approves your loan application, you typically receive one lump sum that you’ve already agreed upon. You repay your debt in fixed installments on a set schedule, often monthly. Outstanding debt accumulates interest at a fixed rate throughout your loan term. Once you’ve repaid the entire balance, your account closes.

On the other hand, a credit card is a type of revolving credit. Typically, card issuers set a credit limit for each new account, depending on the applicant’s creditworthiness. If you don’t spend more than that limit, you can use your card as frequently as necessary.

As you repay your credit card balance, you restore your available credit. Each card issuer typically requires a minimum monthly payment. You can exceed that minimum to pay your balance faster. However, any unpaid balance carried from month to month accumulates interest.

While both personal loans and credit cards usually come with interest, they often accrue interest differently. Personal loans generally accumulate interest at a fixed rate based on the loan amount and term.

Credit card interest rates aren’t always as straightforward. Your interest depends on your annual percentage rate (APR). Some credit cards may have a variable interest rate, which changes with the economy.

Unlike personal loans, credit cards also accrue compound interest. Compound interest accrues on top of your balance and existing interest. Credit card interest often compounds daily.

When to choose a personal loan vs. a credit card

The distinctions between credit cards and personal loans make them each uniquely suited for distinct circumstances.

When a credit card may be better for you

Credit cards could help you cover everyday expenses, like gas, groceries, food, or your morning cup of coffee. To avoid mounting debt, try to use a credit card for purchases you could pay off by the end of the month. Typically, repaying your balance each month protects you from owing much interest.

Did you know?

Certain credit cards allow you to earn rewards like cash back on your daily purchases, and some rewards credit cards allow you to earn extra cash back in specific categories. A good credit card for you may reward the purchases you already make regularly.

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If you already have several high-interest credit cards that you’re struggling to manage, you could also consolidate them onto a balance transfer card with a lower interest rate. Some cards offer a low introductory APR, which could make it easier to reduce your credit card debt.

When a personal loan may be best for you

When you need help financing a specific major expense—like a medical bill, home repair, or cross-country move—a personal loan may help. Because they pay a set amount, you could borrow exactly what you need.

A personal loan with a low interest rate may also work well for debt consolidation. If you have several other outstanding loans that have become difficult to repay, you could use a personal loan to secure more reasonable terms.

You may also easily incorporate personal loan payments into your monthly budget. Because installments and interest are fixed and don’t change, you shouldn’t face any surprise bills. However, missed loan payments could quickly hurt your credit score, so budgeting carefully is important.

If you’re deciding between a personal loan and a credit card, you may want to consider the type of expense you wish to cover, your budget, and your financial goals. Whatever you choose, responsible habits could help you maintain a good credit score.

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