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Should you get a credit card or personal loan?

Both credit cards and loans can offer you access to money when you’re in a pinch. However, they’re not interchangeable. We find out which one is right for you.

11 March 2022Isabelle Coetzee 3 min read
Woman doing calculations

What’s your credit score?

You may be approved for a personal loan or credit card if you have a good credit score.

See my score

A credit card lets you spend money you don't have. Your credit card provider will set a credit limit, which could range from a few hundred rand or several thousands of rands. This is the maximum amount that you’re able to borrow.

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

Lenders are not allowed to charge you an interest rate of more than 14% plus the current repo rate. The interest rate and credit limit you’ll be offered will depend on your credit score.

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Credit cards require you to settle the minimum repayment amount each month. While this is acceptable, you should try to pay more so that you can clear your debt sooner and pay less overall interest.

You can set up a direct debit order to settle the minimum repayment, which is a set amount, or you can manually settle the full bill each month.

Personal loans can be used for larger purchases or to consolidate other debts. Loans can be as small as R2,000 or as large as R300,000, and lenders normally price loans in tiers.

Similar to credit cards, personal loans have a maximum interest rate. Lenders are not allowed to charge you an interest rate of more than 21% plus the current repo rate.

The interest rate and the loan amount you'll be offered will depend on your credit score. Log in to ClearScore to find out what your score is.

Unlike credit cards, there’s no way to avoid paying interest on a personal loan. They have set monthly repayments over a period called the ‘term’. The longer the term, the more interest you’ll pay overall.

For example, if you borrow R10,000 at 7% over three years you’ll pay a total of R1,100 in interest. If you borrow the same amount over 10 years, you’ll pay R3,900 in interest.

When you take out a loan, the lender will tell you how much you need to pay each month. Make sure you’re confident you can 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 may reflect on your credit report.

You can pay off your loan early but you may be charged an early settlement penalty. This applies to loans over R250,000 or home loans, and it constitutes a payment of no more than three months’ interest.

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Credit cards are better than loans for regular spending and when you intend to borrow 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 your debt.

You may want to opt for a credit card because of the membership rewards and cashback benefits. Many credit cards come with complimentary travel insurance, and some even offer monthly vouchers if you spend over a certain amount.

When you make a purchase with a credit card, you usually receive an interest-free period of 55 days. This means that if you repay the amount before the deadline, you won’t have to pay any interest on it.

You can use credit cards abroad but you’ll be charged a higher interest rate and additional fees. They are also a good backup in emergencies because it allows you immediate access to funds.

A personal loan is better than a credit card when 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 – depending on the outcome of your credit application – at a lower interest rate.

If you meet all of your repayments, your loan will be repaid at the end of the term. In general, loans instil discipline as, unlike credit cards, you can’t re-borrow the money you’ve repaid. However, it’s important to note that you do have this option if you opt for a revolving loan.

Loans also don’t have to be taken out exclusively over long periods. You can get a short-term loan and repay it over one to six months. This is a good option if you don’t want to carry the debt long-term.

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Written by Isabelle Coetzee

Freelance Copywriter

Isabelle is a freelance finance writer and journalist in Cape Town. She helps make managing your personal finances calm, clear and easy to understand.