Personal Loans vs. Credit Card Debt

By Sam Swenson | Updated January 5, 2023
reading time 3 min read
Man working in kitchen with laptop learning about personal loans and credit card debt

Credit cards can be a convenient way to handle expenses, but like any other financial tools, it’s important to manage them properly to avoid any stress. It’s easy to rely on credit cards for all spending needs, however, it may not be the best solution for big-ticket expenses.

Personal loans are an alternative option for large purchases that come with different attributes. Here are six things you should consider when comparing credit cards and personal loans:

1. Personal loans have fixed (and often lower) interest rates

The most basic point of comparison is the cost of borrowing, or the interest rate. Upstart-powered personal loans have fixed rates beginning in the single digits. Your loan terms will be determined based on your credit, income, and certain other information provided in your loan application.

Some credit cards offer a low introductory rate, but your rate will reset to the standard rate once the introductory period has expired. On the other hand, there are no surprises with a fixed-rate personal loan: your interest rate and monthly repayments never increase.

2. Using your card’s credit limit hurts your credit score

Using a credit card for large purchases increases your credit utilization ratio, which can hurt your credit score

For example, if you have a credit card with a $5,000 limit, and you charge $4,500, you’re now utilizing 90% of your credit. Keeping your credit utilization around 10% will improve and help maintain your credit score.

On the other hand, personal loans give you the opportunity to diversify the credit that you use. Having a healthy variety of credit sources is one of the five categories used to calculate credit scores.

3. Fixed term personal loans make it easier to stick to a budget

An unexpected expense can be devastating to anyone’s budget. It’s much harder to stick to your savings goals when your monthly bills are unpredictable.. 

A personal loan takes the guesswork out of the equation: the amount borrowed, your monthly payment amount, and timeline for repayment are all known quantities. 

With credit card debt, everything seems as though it’s in flux, which makes it difficult to know what your monthly layout will actually be. The psychology of credit cards makes it easy to overspend and get comfortable making only minimum payments. This can prolong your repayment schedule and ultimately cause you to waste money on interest.

4. A late payment on your personal loan won’t trigger a rate repricing

A late payment on a personal loan will typically cost you a $15 late fee, but your interest rate will remain the same. Since rates have risen in recent months, these penalty rates may be even higher. Remarkably, recent findings in 2020 from the CFPB have shown that credit card companies collect more than $12 billion in penalty fees each year.

5. A personal loan simplifies and consolidates your debt

The average American has about 4 credit cards, each of which comes with its own terms, interest rate tiers, and billing schedule. Needless to say, this can be difficult to track.  

A personal loan enables you to consolidate and simplify your finances by keeping these variables in one place. Behavioral finance studies have shown that the fewer decisions you have to make—and the fewer data pieces you have to memorize—the more likely you are to save and stay on top of your finances.

6. The best personal loans often offer better customer service

Credit card companies are known to be massive and expensive to operate. If you have a problem with your card, getting someone on the phone who has the authority to resolve your issue can be a daunting task.

Online lenders that offer personal loans tend to be smaller companies with less overhead, which ultimately means a better customer experience for borrowers. At Upstart, our customer support team is eager to help answer any of your questions as they arise.

This content is general in nature and is provided for informational purposes only. Upstart is not a financial advisor and does not offer financial planning services. This content may contain references to products and services offered through Upstart’s credit marketplace.

About the Author

Sam Swenson

Sam is a fee-only financial planner, CPA, and freelance writer. After nearly a decade in various Wall Street roles, Sam found a niche in creating objective, accessible, and actionable financial plans for everyday people. Sam has also published long- and short-form personal finance and investment planning content on various websites across the internet. Outside of work, Sam enjoys running, biking, reading, and philosophy, as well as spending time with his wife, daughter, and goldendoodle.

More resources you may be interested in

What Can Personal Loans Be Used For?
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