Credit cards and loans are two common ways to borrow money. But which suits your needs best?
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Credit card vs loan
Credit card, or loan? Which is best?
Why get a credit card?
- You could buy things up to an agreed limit and pay for them later. This could help you spread the cost of a big purchase. You could also move debt from another card.
- You could pay your credit card back each month with a Direct Debit: the money will leave your account automatically. Or you could make one-off payments. You could choose to pay all the balance (what you owe) each month. But each month you must pay at least the minimum stated on your balance.
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Why get a loan?
- You could borrow a fixed amount for a fixed amount of time for example to buy a car, or improve your home. You could also use a loan for debt consolidation (rolling debt from different places into one).
- You'll know how much you'll pay each month and when you'll finish paying it back. Loan terms typically range from 1 to 10 years.
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When a credit card may be suitable
- Could be good for one-off big purchases – like a new washing machine.
- Could be helpful to refinance – so if you want to consolidate debt (roll different debt into one payment).
- Your payments are flexible – you just need to pay the minimum payment each month. It's up you if you pay more. You can choose to pay by monthly Direct Debit, or one-off payments.
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When a loan may be suitable
- Could be good for a big purchase – like a car loan, or home improvement loan.
- Could be helpful to refinance – so if you want to consolidate debt (roll different debt into one payment).
- You'll usually pay the same amount each month by Direct Debit – until you pay off your loan. This makes it easier to keep track of payments.
- You could potentially borrow more money than with a credit card – often up to £50,000 (the amount depends on your credit check).
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Things to consider with credit cards
- They often charge more interest than a loan – so could cost you more.
- It could be harder to budget – as you don't pay a fixed amount back each month.
- Applying for a credit card could lower your credit score for a bit – if you use your card responsibly, this will usually boost your credit score over time. You can often check your eligibility without affecting your credit score.
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Things to consider with loans
- Not as flexible – if you want to borrow more, you'll need to apply again.
- Some loans are variable – this means your interest rates might change while you have your loan. So, your monthly payments could become more expensive.
- Early repayment charges – there's often a fee to pay off your loan early.
- Applying for a loan could lower your credit score for a bit – this usually goes up if you pay off your loan on time. You can often check your eligibility without affecting your credit score.
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When an overdraft may be suitable
- It could be good as a safety net if you have an unexpected bill.
- You only pay interest on what you borrow, not the amount of overdraft you have.
- There's no early repayment charge to pay off the money you owe.
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Things to consider with overdrafts
- The interest rate is usually higher (more expensive) than with a loan or credit card unless you have a student account.
- If you go over your overdraft limit (spending more than we've agreed you can), it could hurt your credit score. This could make it harder to borrow in future.
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Credit card vs loan: Frequently asked questions
