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Should I get a credit card or a loan?

Victoria Russell
Written by  Victoria Russell
5 min read
Updated: 30 May 2024

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 the 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 their effectiveness depends on timely repayments and the nature of the financial management involved

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.

Conversely, maintaining a balance results in accumulated interest on the outstanding amount, with the rate depending on the card and potentially being quite high. It is crucial to comprehend the terms prior to utilising the card.

Credit cards are valued for their versatility. They enable you to carry out purchases, regardless of size, without needing immediate funds in your account.

Moreover, many credit cards come with rewards such as cashback or points that can be redeemed for travel, goods, or services, thereby enhancing the value of your expenditures.

How do loans work?

Personal loans provide a fixed sum that borrowers commit to repaying over time, along with interest. This structured repayment schedule facilitates effective budget management, allowing for precise anticipation of monthly expenses.

Typically utilised 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:

  • Short-term borrowing: For brief needs or smaller, intermittent expenses, credit cards are ideal, helping to manage cash flow without committing to a long-term loan

  • Benefits over costs: The perks associated with credit cards, such as rewards points, cashback offers, and purchase protection, can surpass the interest expenses, particularly if you pay off your balance monthly

  • Payment flexibility: 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

When is a loan a better option?

  • Opt for a loan when financing a large, one-off purchase is necessary. Loans are suitable for acquiring significant sums to be repaid over a fixed period

  • Loans typically feature lower interest rates compared to credit cards, offering savings over the long term, particularly for substantial borrowings

  • A loan offers a definite repayment plan, aiding in financial planning by clearly outlining monthly payments and their duration

Which option is better for building credit?

Both credit cards and loans can effectively enhance your credit score when managed prudently.

Timely payments are crucial for both, with credit cards providing frequent opportunities to demonstrate financial responsibility by regular use and monthly pay-offs.

Conversely, long-term loans reflect reliability over an extended timeframe, necessitating consistent repayments until fully settled.

Each method offers distinct advantages for developing a strong credit history.

Is a credit card cheaper than a loan?

Assessing whether a credit card is more economical than a loan involves various factors.

Credit cards may be preferable for short-term borrowing, particularly if balances are cleared quickly, thus avoiding interest accumulation.

In contrast, loans are generally structured with lower interest rates for longer-term borrowing, making them more suitable for larger amounts needing prolonged repayment.

Additionally, the overall cost can be influenced by extra fees and the specific nature of the purchase, so choosing between a credit card and a loan should take these elements into account to ensure financial efficiency.

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.

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