Balancing Personal Loans and Credit Cards

By: David Halverson April 17, 2023

Balancing credit cards and personal loans can both play a role in a consumer debt portfolio. While no one should take out personal loans or open credit cards just to have them, if you’re really in need, you can leverage the power of these financial instruments to actually help you get ahead. In a well-managed debt portfolio, personal loans and credit cards can help balance each other out in terms of servicing a customer’s needs. Here’s a look at whether personal loans or credit cards are generally better used in a variety of common financial situations.

Carrying a Balance

If you find yourself in the position where you must carry a loan balance, personal loans nearly always trump credit cards as the better option. The primary reason for this is that personal loan interest rates are nearly always lower than what you can get on a credit card. Plus, a personal loan is fixed – unlike with a credit card, where you can keep adding charges all the way up to (and sometimes over) your credit limit, you can’t continue to put money on a personal loan. If you tend to overspend, this can be the first line of defense against adding too much to your debt. 

The primary exception to this rule is if you can snag a 0% promotional rate on a credit card. Properly used, this “free” money can be used for a number of smart purposes, such as paying down higher-rate loans. But the huge caveat with this is that you must be aware of when the promotional period expires. Often after 12, 15 or 18 months, that 0% rate will skyrocket to 15-20% or more, which would ruin your whole strategy if you were carrying a balance.

Daily Utility

You should only use credit cards for your daily expenses if you can afford to pay off your balance at the end of the month. But if you’re in a position to do that, then credit cards make much more sense than personal loans for funding your everyday costs. For starters, credit cards are supremely convenient. You can use them almost anywhere these days, and the amount you charge will just go onto your running balance. Personal loans, on the other hand, are fixed, and you’d have to continue taking out new loans every month to pay off your expenses if you went that route – but then you’d also be committing to a fixed term of payment and interest. Properly used, a credit card can cost you nothing (if you have a no-annual-fee card and pay your bills in full).

When it comes to using credit to finance your daily expenses, however, you’ll have to keep a close eye on your budget. If you’re a profligate spender, running up everyday charges on your credit card could quickly lead to runaway spending, putting you in a deep financial hole. If you feel you’re not capable of managing debt properly, using cash is generally the best option of all.

Rewards and Benefits

When it comes to benefits and rewards, credit cards clearly trump personal loans – but only if you can afford to pay off your balance every month. If you fail to do so, the value of any rewards you receive will likely be outweighed by the cost of your interest charges.

There’s no real competition in this category, as there usually aren’t any promotions at all for personal loans. However, the credit card world is so competitive that if you have good enough credit you’ll be spoiled for choice in terms of picking the types of rewards and benefits you want.

Many credit cards now offer huge sign-up bonuses, granting 100,000 points or miles or more to qualifying applicants for meeting a minimum spending requirement over a few months. If you’re a fan of travel rewards, many cards offer outstanding perks such as airline lounge access, free baggage or elite hotel status. Those looking for cash back can usually find cards that pay rewards of 5% or more in certain spending categories.

Personal loans, on the other hand, rarely offer any type of ongoing perks or sign-up bonuses. If you can manage your balances, credit cards are the big winner in this category.

If You Only Pay the Minimum Required

If you’re struggling with your debt load and can’t afford to pay it all off, you may have to choose the lesser of two evils. If your cash flow is only sufficient to pay off the minimum amount due every month, you’re likely better off using a personal loan instead of a credit card. 

With a personal loan, the “minimum amount due” is your monthly payment, which is computed in such a way that you’ll have all interest and principal paid off by the end of your term. 

However, with a credit card, the minimum amount due isn’t usually a very large sum. Typically, it ranges from 1% to 3% of your outstanding balance. At that rate, it could take years or even decades to pay off your credit card, depending on the size of your balance and your interest rate. The result is that you’ll be saddled with debt – and accruing interest charges – much longer than if you simply paid off your personal loan.

The Bottom Line

Most Americans don’t plan on getting into debt. However, if you find yourself with an outstanding personal loan and/or credit card balance, you can take steps to proactively manage that debt and make it work for you in the best way possible. 

The first step is to understand how debt works – and the damage it can cause if it gets out of hand. Next, choose which type of debt is more appropriate for your financial circumstances. Lastly, create a debt management plan – and, ultimately, an exit strategy – so that your debt doesn’t become a drag on your daily finances.

Ready to get started?

How much money do you need?