Are credit cards better than personal loans?

Personal Finance · 29 Jan 2020

Whether you want a bit extra to cover the cost of a new car, a holiday overseas or to create your dream wedding, there are times when having a bit…

Whether you want a bit extra to cover the cost of a new car, a holiday overseas or to create your dream wedding, there are times when having a bit of extra money available can make a world of difference.

There are a few options available when you need a bit more capital. For most Australians, the main choice is between a credit card and a personal loan.

There's no clear-cut answer for which is the better option, as the decision depends on many personal and financial factors that determine what is most suitable for you. As a guide though, here are some considerations before you make any application.

How much money do you need to borrow?

As a general rule, it's better to go with a personal loan if you need a larger amount.

Credit cards are a great option if you only need a small amount or if you need a safety net each month that you know you'll be able to pay back promptly.

With a credit card, you can spend as little as you need and you can get cards with limits of just a few hundred dollars. However, even that amount can quickly rack up huge interest if not paid off quickly.

Personal loans on Harmoney can cover amounts from $2,000 up to $70,000 (depending on your credit history and other factors).

Before you make a decision on what to apply for, it's a wise idea to make a budget and see what you can afford to pay back.

Interest rates and other fees

Credit cards often come with enticing interest-free periods. If you only need to borrow a little bit of money and you know you can pay it back quickly, then you can use this in your favour.

However, if you borrow a large amount on a credit card that you're going to take months or even years to pay off, then it's very important to look at the small print. Interest rates on credit cards are notoriously high and if you don't pay off the full amount each month you can find yourself in trouble.

With a personal loan, your interest rate for the entire term is made clear upfront. As there's no way to spend more on your loan – like there is with a credit card – you have a definitive end date with a loan, so no way for your expenses to creep up.

In terms of fees, personal loans on Harmoney has one fee at the very start of the loan and then no more if you make all your repayments on time. Depending on your credit card, you may have annual fees to pay.

Multiple credit cards

One of the biggest mistakes that people make with credit cards is to have too many of them. While using one to cover small expenses can be a smart way to expand your credit, if you start adding to your collection you may find yourself in financial trouble.

With each credit card you have, you're likely to find that you have high interest rates to cover and a different date to make payment. It's easy to get confused with the admin and for it to become hard to pay off the debt, which gets bigger the longer you have it.

If you're in this position, you may benefit from taking out a debt consolidation loan. What this loan does is cover existing debts – meaning you can pay off all your credit cards and keep your debt in one manageable place.

With a personal loan like this, you'll only have one monthly repayment to make and it's very likely you'll have a lower interest rate to boot. To get an idea of what your repayments might look like, try out our personal loan calculator before applying for a loan.

Personal loans versus credit cards

You should always make financial decisions after careful consideration of your needs and situation.

In general terms, a credit card is a good way to create some flexibility with your cash flow, so long as you're careful with your spending and you pay off your outstanding amount within the interest-free period.

Personal loans tend to be better for bigger purchases, especially when there will be an amount owing for months or longer. Interest rates tend to be lower in the long run, you can normally get more money upfront and they can be a handy way to get existing debt under control.

Other articles you might like:

Debt consolidation: is it right for you?

Pay off your loan faster

Should you get a personal loan or extend your mortgage?

We write these articles for you, our Harmoney borrowers, to be, what we hope, are helpful tools. The information is correct at the time of posting and is designed to be a general guide only. As you read, you should consider how - or if - the information might apply to your circumstances, and consider if your needs mean you should seek further, independent expert advice.

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