Today, there are at least 189 million adults in the U.S. who have at least one credit card.
With a competitive job market and perilous wage stagnation, it’s getting harder and harder for Americans to pay their bills or make big milestone purchases, like buying a house.
But when you need some extra cash, is a credit card really the best option? Well, you have two choices: a personal loan versus credit card. We’ll break down the pros and cons of both right here.
How Credit Cards Work
To characterize a credit card as a “loan” is a bit of a misnomer. With a credit card, you are given a line of credit that allows you to pay for things with money that the bank lets you borrow, up to a certain amount. In this sense, it is a loan.
But you’re not really supposed to use it that way.
Ideally, the debt you take on with your credit card is supposed to be paid off in full at the end of each month. If you don’t at least make the minimum payment on your credit card balance, you will hurt your credit and accrue interest on your debt, making the problem worse.
For this reason, a credit card is not a great choice if you need money to make a big purchase, as you’ll be expected to pay it off quickly.
Why Credit Cards May Still Work as a Loan
Contrary to what we’ve said above, credit cards may still work for small loans. Most credit cards these days have introductory APR rates of 0% (meaning there is no interest) of at least a year.
So if you want a small loan to buy, say, an Xbox and a TV, you can get an essentially interest-free loan for these things with a 0% APR credit card.
How Personal Loans Work
Personal loans are a more clear-cut, effective tool for money lending. Personal loans are for longer-term financing, meaning you have much more time to pay it off. Personal loans also typically have lower interest rates.
So if you, for example, wanted to buy a new car, you’re much better off getting a personal loan than putting a new Range Rover on a credit card. This is because, one, you likely won’t get a credit line that large, and two, you won’t likely be able to pay it off before the introductory APR period ends.
With a personal loan, you get to pay off your debt a slower, more sane pace, and won’t suffer the ails of compounded credit card interest.
Personal Loan Versus Credit Card: Which Is Ultimately Better?
Hopefully, this quick article has shed some light on the personal loan versus credit card debate. Which is better for you, is ultimately dependent on your financial needs and situation.
If you want to make a big purchase, we recommend a personal loan, but if you want to make a small-ish purchase (under $500, let’s say) a credit card may be the best route for you. If you need any more advice on loans, be sure to check out our section on small personal loans!