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Personal Loan vs Credit Card

Get to know personal loans and credit cards and how they compare.

15 August 2023Lloyd Smith 7 min read
Personal loans versus credit cards

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Personal loans and credit cards can be incredibly useful when you need sudden access to credit to pay for expenses. While both extend a line of credit, they are still significantly different from each other.

So which one is better: a personal loan or credit card?

The answer to that depends on how you will be using the credit card and how you can ideally pay it off. Let's look at the ultimate comparison between personal loan vs credit card.

A personal loan is a set sum of money you borrow and pay it back over time in instalments. When the new line of credit is extended to you in the form of a personal loan, you receive all the funds at once. Then, you are expected to make predetermined repayments at regular intervals.

Personal loans can be used for a variety of purposes, such as upgrading or repairing a home, emergencies, or for holidays.

There are two types of personal loans: secured and unsecured loans.

  • A secured loan requires you to provide collateral as part of the lending arrangement.
  • An unsecured personal loan does not require any collateral

Most personal loans are unsecured and are available instantly for borrowers with a decent credit score. There are also personal loans for bad credit available in case you have been struggling to get approved for loans due to poor credit score.

  • Easy and quick approvals: Most personal loans get approved quickly, often within the span of a day or two.

  • Money withdrawals without any interest or fee: Once the personal loan funds have been dispersed to your bank account, lenders don’t care how you are using those funds. You can withdraw cash from your account and there won’t be any extra charges for it.

  • Use the entire loan amount without any impact on your credit score: Whether you use the entire loan amount or a part of it doesn’t impact your credit score in any way, as long as you repay the loan instalments on time.

  • No incentives: Most personal loans offer no incentive programs like offer cash back deals or reward points.

  • Less flexible: You are required to pay fixed monthly instalments every month, with no way to decrease the instalment amount. It could be challenging to change monthly payment plans.

  • Loan defaults can impact your credit score: If you miss an instalment, you will normally be charged a penalty or late fee. If you miss multiple repayments, it may lead to a payment delinquency and eventually a loan default. This can be noted on your credit report for up to seven years and affect your credit score..

Credit cards are a type of revolving credit where you can get credit up to a set limit. You can repay some or all the credit balance, and then request for more once again. Revolving credit essentially means that your credit limit gets automatically renewed as you pay previous debts.

The purpose of a credit card is to cover minor and more regular costs that you can repay off fairly quickly. Most credit card limits aren't high enough to allow you to make large purchases. While you can apply to increase your credit card limit it is not recommended that you use the entirety of the credit limit as that can increase your credit utilisation ratio and decrease your credit score.

Every month, a credit card bill is generated. You get the option to pay the entire amount at once or only pay a minimum amount. Interest rate is charged on the unpaid balance and added to the next month’s bill.

Credit cards often come with alluring offers to attract customers. There are low interest credit cards, zero interest credit cards, and even cards with good rewards programs. It's important to understand the types of credit cards before you choose.

  • Purchase protection: Most credit cards offer fraud protection on any kind of unauthorised charges which you can report within 30 days.

  • Rewards and bonuses: Most credit cards also offer rewards in the form of frequent flyer miles, cashback, or reward points. Some also offer welcome bonuses when you get a new card.

  • No interest on timely payments: As long as you pay off your credit card dues on time, there is no interest charged on the borrowed amount.

  • High fees and interest: Credit cards charge interest on the borrowed amount (if you don’t pay up your bills on time). Apart from that, credit card providers also charge several other fees including maintenance fees, annual fees, foreign exchange fees, and late fees.

  • Cash withdrawals attract an extra charge: Some credit cards allow you to withdraw cash from the ATM just like a debit card, but they attract an extra cash advance fee.

  • Potential to overspend: With a revolving credit and reward points, it can also become rather alluring to continuously use credit cards – even for expenses you can’t afford. Before you know it, you may end up with a large debt. Fees and interest can also quickly pile up on monthly balances when you pay only the minimum amount due or skip making payments.

The most distinguishing factor between credit card vs personal loans is that cheap credit cards present you with a spending limit. However, a cheap personal loan credit provides you with a lump sum immediately.

Interest rates

Double-digit interest rates are common for credit cards. Interest rates for credit cards are levied when you don’t make credit card payments on time, hence they can be avoided by paying your balance in full each month. You may even be liable to pay a late fee and interest can be incurred on that as well.

In case of bank loan credit, the total amount disbursed is subject to a fixed interest rate. Usually, there will be a penalty if you miss a payment. Missed instalments first lead to a payment delinquency which can later turn into loan defaults if you don’t make pending payments.

Charges and fees

A credit card usually has a lot of fees associated with it including joining fee, annual fee, cash advance fee, late fee, and more. Interest rates can be accrued on all of them.

If your personal loan has a fixed interest rate, which is usually the only thing you need to pay. In some cases, lenders may require you to pay an application fee, late fee, or early loan closure fee.


By the monthly set deadline, you must pay the minimum sum or the whole total debt on your credit card. When a payment is missed, you are often given a penalty or late fee, apart from the interest charge over the whole balance.

Personal loans involve making repayments over a specific period of time. If you cannot pay the balance on time, you will probably be issued a late fee. A loan can also be repaid early. However, some personal loans have fees for any early closures as well.

Issuance of funds

Credit cards feature a revolving line of credit, which means you can borrow as much amount as you need every month. The total credit limit available to you depends on the type of credit card you have and your credit score.

Personal loans offer the entire amount in one go. You can’t extend the loan amount once it has been issued. The only way to do it is by getting another loan.

Unless you can get approved for a low interest credit card or you are sure you can pay off your card bills on time every month, credit cards can be a very costly affair.

Credit cards are an ideal choice if:

You are eligible for an interest free promotional offer

You can build credit with credit cards that offer 0% interest rates for all purchases – even if its only for a promotional period.

You can pay the entire amount in full and on time

Credit card lenders provide greater repayment flexibility, but it only works in your favour if you can pay the pending amount on time, every time. Delayed payments can lead to interest and even affect your credit score.

You need to finance recurring expenditures and small scale borrowing

If your credit card offers incentives for frequent purchases, like groceries, it's a smart idea to use it for routine expenditures. This ensures that you can easily pay off the credit card loan.

You can use cheap personal loans for housing upgrades, consolidating massive debt into a manageable one, and more.

Personal loans are an excellent alternative if you:

You have a huge one time expense

Personal loans are not intended to be used regularly. When you have a big one time expense, they can help in the time of need.

It can be difficult making huge one-time expenses through credit cards. Just because you have a $5000 credit card limit doesn’t mean you should be using up the entirety of that limit in a month. In fact, it is recommended that you only use 30% of your credit limit to keep your credit utilisation under check. Spending over the card limit every month can affect your credit score.

You can get a low APR

Low-interest loans allow you to pay off your principal faster and make your monthly payments more manageable. A good credit score can guarantee a low APR on loans. You should check the minimum credit score for personal loans in Australia before applying for a loan in order to get a clear idea of the interest rate you might get. While there are still no credit check loans available which are issued directly without any kind of credit inquiries, but they are usually high interest.

You can pay back the loan with monthly instalments

Defaulting on repayments lowers your credit rating, just like with credit cards. That is why, personal loans can only be useful to you if you are sure you can pay them on time

A debt consolidation loan is a kind of personal loan that enables you to combine multiple debts into one, such as credit card balances or other personal loans, so you only have to pay a single instalment every month. Most debt consolidation loans offer a lowered interest rate.

A balance transfer credit card allows you to transfer your existing credit card debts to a new card with a substantially cheaper interest rate or zero interest rate altogether. But the lowered interest rate is usually for a fixed promotional period only.

A debt consolidation loan is a suitable alternative if the interest rate is lower than the interest rate on your current loans. A balance transfer card with a 0% APR introductory period is a suitable alternative if your debt is manageable and may be settled in about one year.

When it comes to the personal loan vs credit card, it all depends on your current debt and your financial requirements. Before applying for a loan, you should make sure to check your credit score to review your eligibility for both.

ClearScore allows you to check your credit reports for free and get credit score so you can review personal loan and credit card offers.

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Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.