Should I get a credit card or a loan?
Both are ways of spending money that isn’t really yours. But which option is best? Let’s find out together.
So you need some cash and you need it now. It might be for a car, some home improvement, or a holiday.
Whatever the reason, the two most common ways to get said cash are with a credit card or a personal loan.
But which is best for you?
Before you start
Ask yourself two questions before you set out:
How much do I need to borrow?
How much can I afford to repay each month?
This will give you a rough idea of how quickly you’d be able to pay it off.
Whether a credit card or loan is best for you will largely depend on how much you want to borrow, and the period of time it’ll take to pay it off.
When is a credit card best?
If you’re borrowing a relatively small amount – up to about £5,000 – credit cards are usually a better option.
This is because you can pick up credit cards that have an interest-free introductory rate for a certain amount of time.
These periods of 0% interest make them a better choice for smaller borrowing.
A personal loan for the same amount would require interest to be paid from day one.
As tempting as an interest-free period may be, be aware that once it ends, or if you miss a payment, you’ll start being charged a higher rate of interest.
If you’re a reliable borrower, you could also be eligible for rewards like cashback, in-store advantage points or air miles.
You’d be hard pushed to find a personal loan that can boast similar rewards.
When is a loan best?
Credit cards tend to have an upper limit on how much you can borrow.
For anything over £5,000, a personal loan might be more your cup of tea.
Personal loans tend to have lower interest rates than credit cards, not including any 0% introductory period.
So if your planned repayment time is longer than the amount of time you’d get with an interest-free credit card, opting for a loan might be more cost-effective.
With an unsecured personal loan, there tend to be fewer pitfalls than with credit cards.
A credit card has more risks that you could be slapped with extra charges if you use it to take cash out or use it abroad.
With a loan, the money’s yours to do with as you please.
The trick is to weigh up your options and see which is best for your finances.
Your credit history
Most loans and credit cards base interest on representative APR – that means the amount of interest that 51% of its customers are able to get.
This means that you’re not guaranteed the interest rates advertised. Your credit history will play an important part in defining:
your interest rate
your borrow limit
So you might decide to take advantage of a lengthy 0% introductory rate, only to find out that your credit rating has reduced the length of the interest-free period.
If you want to get an idea of how likely you are to be accepted for a credit card without it leaving a mark on your credit score, take a look at this credit card eligibility tool.