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Should I get a credit card or loan?

Should I get a credit card or a loan? What amount of money should I borrow on a credit card or a loan? We look at why you’d want to choose one over the other

29 November 2019Andre Spiteri 6 min read
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First of all, let's get the basics straight.

Credit cards are a form of ‘revolving’ credit. This means you can borrow money up to your credit limit, repay some or all of the debt, and then borrow the money again.

A loan is a more structured form of borrowing. You receive a cash lump sum and then repay it, plus interest, in equal instalments over a set period of time.

A credit card lets you spend money you don't physically have. Your credit card provider will set a credit limit, which might be a few hundred or several thousands of pounds. This is the maximum you can borrow at any one time.

If you pay your bill in full each month you won’t be charged any interest on the money you have borrowed. If you don’t pay off the full balance, you’ll be charged interest.

A credit card’s APR (annual percentage rate) takes into account the card’s interest rate plus any fees and charges you have to pay upfront. Credit card APRs range from about 6% to 50%. The average card charges about 18%.

The APR and credit limit you’ll be offered will depend on your credit score. You can check your credit score and view your credit card offers on ClearScore.

A good credit score is necessary if you want a credit card with an introductory offer of 0% interest on purchases. 0% purchase cards mean you can avoid paying interest on spending for a number of months.

Browse your offers on ClearScore without harming your credit score. See your credit card deals.

Credit cards require you to pay at least the minimum repayment each month. This will normally be the greater of a percentage of your balance (e.g. 3%) or a cash amount (e.g. £5). Be careful: just paying the minimum each month will mean it will take a long time, and a large interest bill, to clear a debt.

You can set up a direct debit to pay the minimum repayment, a set amount, or the full bill each month.

Credit cards let you spread the cost of large purchases or just your everyday spending. They can give you some breathing room if you need something before payday – some even come with rewards, like cashback or air miles.

It’s important to understand that you’re entering a credit agreement. You agree to pay off whatever you spend, pay interest if you carry over the balance and pay additional fees listed in the terms and conditions.

But, using a credit card little and often can help you build your credit score (as long as you pay back what you owe responsibly). That’s because it shows lenders you’re comfortable managing regular small and short-term debt. And a better credit score could mean better offers on things like loans and other cards in the future.

Personal loans can be used for large purchases, or to consolidate other debts. Loans are normally available from £1,000 up to £50,000 or more.

Lenders normally price loans in tiers. In general, the more you borrow, the lower the loan’s APR. APRs can be as high as 30% for loans of £1,000 but as low as 3.1% if you’re borrowing more than £7,500.

The APR and loan amount you’ll be offered will depend on your credit score.

Unlike credit cards, there’s no way to avoid paying interest on a personal loan.

Browse market-leading deals and exclusive offers on ClearScore. See your loan deals.

Personal loans have set monthly repayments over a period of time called the ‘term’. The longer the term, the more interest you’ll pay overall.

Consider the following representative examples from a lender on our panel:

If you were to borrow £10,000 at a nominal fixed annual rate of 3.4% per annum, representative 3.4% APR.

If borrowed over three years then your monthly repayments would be £292.35 and the total amount repayable would be £10,524.60.

If you borrowed the same amount over seven years then your monthly repayments would be £133.71 but the total amount repayable would be £11,231.64.

When you take out a loan the lender will tell you how much you need to pay each month. You can set up a direct debit to make the payment.

It’s important to be confident you’ll be able to pay the required amount each month until the end of the term. If you miss a payment, you’ll be charged a penalty fee and the default could appear on your credit record.

You can pay off loans early but you may be charged an ‘early redemption penalty’ which is normally one or two months’ interest.

Personal loans let you plan ahead – you’ll know the exact amount you’re borrowing, how much your monthly repayments are and what the total interest is, up front. They can be helpful when you need to make a large purchase and you want to plan your budget ahead of time.

All loans are a form of debt, and you risk losing your assets (if you take out a secured personal loan) or debt recovery action if you’re unable to make the repayments. But taking out a loan and making the repayments on time and in full, in line with your loan agreement, can help improve your credit score. That’s because lenders can see you’re responsibly managing lines of credit.

Credit cards are better than loans for regular spending and borrowing smaller amounts. They are also a good option if you’re unsure how much money you need to borrow, or you need flexibility regarding repaying the debt.

Credit card purchases benefit from protection under section 75 of the Consumer Credit Act. If you buy something costing between £100 and £30,000, and pay for just part of it with a credit card, the credit card company becomes jointly liable with the retailer if anything goes wrong.

You can use credit cards abroad although you’ll be charged a higher interest rate and additional fees. But they are a good back-up in emergencies.

Some credit cards also offer reward points or cashback.

A personal loan is better than a credit card if you need to borrow a large amount of money and can make regular repayments.

You can normally borrow more money with a loan than a credit card, and at a lower interest rate.

Providing you make all the repayments when due, your loan will be repaid at the end of the term. Loans instil discipline as, unlike credit cards, you can’t re-borrow the money you’ve repaid.

You should ask yourself what you need the money for – is it everyday spending, or a big one-off purchase, for example.

You should check your credit score – a lower score could mean you only see offers with high interest rates or additional fees. Waiting until your score improves could mean seeing offers that work for you.

And, you should always make sure you can afford repayments before applying for a line of credit.

Because all lines of credit are a form of debt, your credit score will be impacted. When you apply for a credit card or loan, the lender will do a hard search against your credit history. It’s typical for a hard search to impact your credit score, but if you pay back what you owe in line with the credit or loan agreement, the impact should be short-term.

It’s a good idea to wait about six months between applying for credit, because every hard search knocks you score down by a few points. And your score impacts the types of offers you see.

If you miss a payment or are unable to make them, your credit score can be negatively impacted. But, if you make the repayments on time and in full, you could start to see a rise in your score – because you’re building a track record of managing money responsibly.

Whether you choose a personal loan or a credit card, make sure to look out for our Triple Lock guarantee - your key to credit confidence. Using your credit report and linked accounts, we’ll find Triple Lock offers that are right for you. Whenever you see an offer that’s Triple Lock guaranteed, you’ll get a guaranteed credit limit, guaranteed rates and you’ll be pre-approved. So you can be 100% certain you’ll be accepted.

So, whether you’re planning something special or just want some “in case of emergency” credit, we’re here to help you get on in life.

Next step: Check out your Triple Lock guaranteed offers.

Andre Spiteri Image

Written by Andre Spiteri

Financial Writer

Andre is a former lawyer turned award-winning finance writer.