Trying to decide between a personal loan or a credit card to pay for some upcoming expenses?
Here is a look at the pros and cons of using each.
It’s fast and convenient to pay by credit card. And if you have a credit card with a large enough credit line you will be able to charge the full amount on one card.
- Low rates for good credit. If you use a card with a low introductory rate on new purchases, you may pay very little interest on the purchase for several months. You will need good credit to qualify for a credit card with a special low teaser rate.
- A big charge could hurt your credit score. Charging a big expense on a low-interest rate credit card may save you money, but it could hurt your credit score by increasing your credit utilization.
Let’s say you charge $5,000 on a credit card with $10,000 limit and you carry the balance rather than paying off most or all of it. By doing so, you are utilizing 50 percent of your credit line. Consumers with the best credit scores use 10 percent or less of their credit lines.
- Rates are variable. Credit card rates are variable and the amount you are charged for maintaining a balance may change over time.
With a personal loan, you are charged a fixed interest rate for a fixed repayment period, typically three to five years. Paying off a personal loan is a steady and predictable way of paying for a big expense.
- Good for budgeting. Once you qualify for a personal loan, you select a loan term and monthly payment amount that fits your budget. And if you choose a loan with no prepayment penalties you can pay ahead if you wish.
- No impact on credit utilization. Personal loans are viewed differently than credit card accounts by many credit scoring models. If your personal loan is listed as an “installment” loan rather than “revolving” credit, it will not be counted in your credit utilization ratio.
- Loan inquiry lowers credit score. Applying for a personal loan will be counted as an inquiry into your credit and this will lower your credit score a little bit. So avoid shopping around for a loan by applying for several loans at the same time. Instead, ask a potential lender for the minimum credit score they require. Check your credit score before you apply — Credit.com’s free Credit Report Card is a tool that allows you to monitor your credit scores. Select a lender with credit requirements you are likely to meet.