Skip to content
Home » Personal Loans vs. Credit Cards: Which Is Better for Your Credit?

Personal Loans vs. Credit Cards: Which Is Better for Your Credit?

Personal Loans vs. Credit Cards: Which Is Better for Your Credit?

When you need to borrow money, should you choose a personal loan or a credit card? Both can impact your credit, but they work differently. Here’s a comparison to help you decide.

Personal Loans

  • Type: Installment loan with fixed payments and term.

  • Credit Benefits:

    • Improves credit mix (10% of FICO).

    • On-time payments boost payment history (35% of FICO).

    • Can lower credit utilization by paying off credit card debt.

  • Best For: Large, one-time expenses or debt consolidation.

Credit Cards

  • Type: Revolving credit with flexible payments.

  • Credit Benefits:

    • Builds payment history with on-time payments.

    • Keeping utilization below 30% helps your score.

  • Best For: Ongoing expenses or building credit with small purchases.

Which Is Better?

  • For Credit Building: Personal loans are great for diversifying your credit and paying off high credit card balances. Credit cards are better for establishing a credit history from scratch.

  • For Financial Hardships: Personal loans offer fixed payments and lower rates (often 7-15% vs. 20%+ for credit cards), making them ideal for covering large emergency costs.

  • For Flexibility: Credit cards allow you to borrow as needed, but high balances can hurt your utilization ratio.

Key Tip

Use a personal loan to consolidate credit card debt, then use the card sparingly to keep it active. This combo can improve your score while keeping costs low.

Conclusion

Both options can help your credit, but personal loans are often better for significant expenses or debt management, while credit cards suit smaller, ongoing purchases.