Should I get a credit card or a loan?
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 without needing immediate funds in your account.
They can have other functions too. Balance transfer cards help you consolidate and pay off debt and rewards credit cards offer perks such as 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:
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.
Payment flexibility
Credit cards generally offer greater repayment flexibility than loans, allowing you to pay more when you can, although minimum repayments still apply. While you might be able to overpay on a loan, there is often an early repayment penalty if you clear the debt in full.
0% interest deals
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.
Benefits over costs
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.
When is a loan a better option?
There are situations when taking out a loan might be a better choice than a credit card. These include:
Making a large, one-off purchase
If you don’t have the funds, a 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.
Lower interest rates
Loans typically feature lower interest rates compared to credit cards, offering savings over the long term, particularly for substantial borrowings.
Fixed repayment plans
A loan helps financial planning by clearly outlining monthly payments and their duration.
Longer terms
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.
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 (£2,000 | £333.33/month | £166.67/month (£2,000 |
Credit card | Standard interest rate (18.9% APR) | £2,031.50 (£2,031.50 | £348.08/month (£2,088.48 | £184.35/month (£2,212.20 |
Personal loan | Fixed 6.9% APR over 12 months | N/A | £343.45/month (£2,060.70 | £172.96/month (£2,075.52 |
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 can potentially cost nothing in interest if you pay the balance in full every 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.
Also be aware that taking out credit cards and loans are not the only ways to boost your credit score.
Is a credit card cheaper than a loan?
Credit cards can be cheaper for short-term borrowing, especially with a 0% deal, while loans are often better for larger or longer-term borrowing because they usually have lower fixed rates.
It’s worth spending time understanding how both products work before deciding.
Consider factors such as whether the monthly repayments on a loan will be affordable or whether you’d be able to clear the credit card balance before higher interest charges kicked in.
Also, look at the total amount you might pay in each case and what happens if you’re late with a payment and the penalty you’ll face if you miss one altogether.
Can I use both a loan and a credit card?
Yes, you can use a loan for large, planned borrowing and a credit card for everyday spending or short-term flexibility. The key is ensuring repayments remain affordable across all borrowing.
What happens if I miss a payment on a loan or credit card?
Missing payments can lead to fees, extra interest, damage to your credit score and, in some cases, loss of promotional rates such as a 0% credit card offer.
Are loans or credit cards easier to be approved for?
It depends on your circumstances, income and credit history. Stronger credit profiles generally unlock better rates and more choice on both products, while specialist options exist for some borrowers with limited or poor credit histories.
Other useful guides
If you’re looking for more information on loans and credit cards, MoneySuperMarket has plenty of guides to help. These include:
Personal Finance & Insurance Expert
Our expert says...
"Choosing between a loan and a credit card is less about which product is ‘better’ and more about matching the borrowing tool to the job. A credit card can work well for short-term borrowing, everyday flexibility or making the most of a 0% deal – but only if you have a clear repayment plan. Loans tend to suit larger, planned expenses where fixed monthly repayments bring certainty. Before deciding, compare not just the interest rate, but the total amount you could repay over time.”
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.
Author
Tim Heming
Personal Finance Expert
Tim Heming is a journalist and editor who has written about personal finance for national newspapers and consumer websites for 15 years. Tim enjoys providing no-nonsense information to help consumers...
Reviewer
Alan Cairns
Senior Content Editor
Alan breaks down money, home, and energy topics into plain English to help you save money. Ask him about pound cost averaging or Balkonkraftwerk.
