Should I get a credit card or a loan?
Both a loan or a credit card can be an option if you need some additional funds. The correct choice for you will depend on your circumstances and goals, as our guide explains.
Key takeaways
Credit cards provide a revolving credit line for flexible borrowing and potential rewards, while personal loans offer fixed sums with structured repayment schedules for larger, one-time expenses
Choosing between a credit card and a loan depends on your financial need, with credit cards suitable for short-term, flexible repayments and loans better for significant, long-term financing
Both credit cards and loans can aid in building credit, but it shouldn’t be the prime objective of a loan. Their effectiveness also depends on making timely repayments
How do credit cards work?
Credit cards offer a revolving credit facility, allowing you to borrow up to a specified limit and continue borrowing as long as you repay the funds.
When you use a credit card for purchases, you are essentially borrowing from the provider. By settling your balance in full each month, you can avoid interest charges.
Maintaining a balance results in accumulated interest on the outstanding amount, with the rate depending on the card and potentially being quite high. As such, it is important to understand the terms before you apply.
Credit cards are valued for their versatility. They enable you to carry out purchases, regardless of size, without needing immediate funds in your account.
Many credit cards reward your spending with cashback or points that can be redeemed for travel, goods, or services.
How do loans work?
Personal loans provide a fixed sum that borrowers commit to repaying over time, along with interest. This structured repayment schedule means you’ll know how much you’re paying each month until the debt is cleared.
Typically used for substantial, one-time costs such as home improvements, vehicle purchases, or debt consolidation, personal loans spread the expense over months or years, easing the immediate financial burden.
When is a credit card more suitable than a loan?
The choice between a credit card and a loan hinges on your financial requirements and situation. Here are some instances where a credit card might be more appropriate:
For brief needs or smaller, intermittent expenses, credit cards are ideal, helping to manage cash flow without committing to a long-term loan.
Credit cards provide the option to settle your debt at your own pace. Unlike loans, most credit cards do not impose penalties for early repayment, potentially saving you interest costs over time.
Credit cards with introductory 0% interest rates can allow you to borrow for a number of months at no additional cost. If you can clear your debt within that period, there is no interest to pay.
Perks such as rewards points and cashback offers, and purchase protection can make having a credit card beneficial, providing you pay off your balance in full each month.
Short-term borrowing
Payment flexibility
0% interest deals
Benefits over costs
When is a loan a better option?
There are also situations when taking out a loan might be a better choice:
If you don’t have the funds, a personal or secured loan can help you borrow significant sums to be repaid over a fixed period. In contrast, a credit card comes with a credit limit which might not be high enough for your intended purchase.
Loans typically feature lower interest rates compared to credit cards, offering savings over the long term, particularly for substantial borrowings.
A loan helps financial planning by clearly outlining monthly payments and their duration.
You’ll know exactly how much you must pay each month with a loan until the debt is cleared. In contrast to a credit card, the right loan deal might see you pay a lower interest rate over a longer period, but keep payments manageable. The risk of longer term debt is that you pay back more overall than you need to.
Making a large, one-off purchase
Lower interest rates
Fixed repayment plans
Longer terms
Comparing credit card borrowing versus a loan
The following example shows a comparison between borrowing £2,000 on a a 0% purchase credit card, a credit card at the standard interest rate, and a personal loan. It shows how much it would cost if you clear the debt over different terms.
Option | 1 month | 6 months | 12 months | |
Credit card | 0% purchase deal for 12 months | £2,000 | £333.33/month | £166.67/month |
Standard interest rate (18.9% APR) | £2,031.50 | £348.08/month | £184.35/month | |
Personal loan | Fixed 6.9% APR over 12 months | N/A | £343.45/month | £172.18/month |
You pay no interest if you clear the balance within the promotional period on the 0% purchase credit card. Payments spread evenly over 6 or 12 months remain interest-free, assuming no late payments. if no If no 0% offer applies, interest starts accruing immediately at 18.9% APR. Personal loan has fixed 6.9% APR, ensuring predictable monthly payments.
Which option is better for building credit?
Both credit cards and loans can effectively enhance your credit score when managed prudently.
However, taking out a loan to improve your credit rating is a costly way of doing it, whereas a credit builder credit card doesn’t have to cost you anything provided you pay off the balance in full each month.
Whether you take out a loan or credit card, the important aspect for increasing your credit score is that you don’t miss any payments. Otherwise both means of borrowing can have a negative effect.
Is a credit card cheaper than a loan?
Working out whether a credit card will be a cheaper way of borrowing than a loan depends on various factors.
Loans and credit cards are different financial products, so it’s worth spending time understanding how they work before making a decision.
For example, credit cards may be preferable for short-term borrowing, particularly if you can get a 0% interest deal and balances are cleared quickly to avoid interest.
In contrast, loans are generally structured with lower interest rates for longer-term borrowing, making them more suitable for larger amounts.
Compare credit cards with MoneySuperMarket
If you’re looking for a credit card, it’s quick and easy to compare with MoneySuperMarket.
Our eligibility checker tool shows you the cards you’re most likely to be approved for by doing a ‘soft’ credit search, which won’t affect your credit score.
You'll be shown a range of credit cards, which you'll be able to sort according to features such as interest rate, length of interest-free period and your chances of being approved, before making a final decision. That way you can apply with greater confidence.
MoneySuperMarket is a credit broker – this means we’ll show you products offered by lenders. We never take a fee from customers for this broking service. Instead, we are usually paid a fee by the lenders – though the size of that payment doesn’t affect how we show products to customers.
