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Personal Loan vs. Credit Card: How to Decide?

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Credit cards are a go-to source of financing for most Americans. In fact, the average adult has three credit cards and over $6,000 in credit card debt. But carrying a credit card balance or putting a large purchase on your card may not be the smartest financial decision. In some cases, taking out a personal loan instead of reaching for the plastic can offer surprising benefits and savings.

So, personal loan vs. credit card—which option is right for you?

How does using a credit card work?

Let's start with this: a credit card is a revolving form of debt. You’re given a certain credit limit—maybe it’s $5,000—which means you can charge up to that amount on your card. If you’ve got the cash on hand, you can pay off your credit card balance each month—an affordable way to build your credit profile and conveniently finance a purchase you know you can pay off next month. If you’re not able to pay off your balance in full each month, you will be required to pay at least a minimum amount toward your total balance (which will include any interest that has accrued).

How much is that credit card really costing you?

The true cost of your credit card is measured by the card's APR, which includes the interest rate and associated fees. A widely-accepted and easy form of credit, credit cards are one of the priciest tools available for financing debt over time. Currently, the average national APR on a card is slightly above 17%, however, rates can be much, much higher, depending on your personal credit profile.

Of course, if you pay off your purchases in full each month, your card’s APR matters less (you could still have balance transfer fees and annual fees). However, most users are not able to pay off their credit card bill in full every month. Carrying a balance over time forces you to deal with accruing high interest rate charges. This means your outstanding balance will continue to grow—even if you stop using your card for new purchases. That’s because each month your new balance equals the sum of all your charges plus accrued interest charges.

When it comes to credit cards, that accrued interest can get out of hand quickly. In addition to an already high APR, you face what’s called compounding interest on your credit cards. That is, you’re paying interest on your purchases and interest on the unpaid interest.

As a result, paying only the minimum amount required—typically only 1% to 3% of your balance—can be a recipe for spiraling into deeper debt. In fact, you might be shocked to discover exactly how long you’ll be paying off even a small debt and how much you’ll pay in interest during that time.

> Pro Tip: How much is your credit card costing you? Plug your existing credit card debt into Credit.com’s easy online calculator.

Is a personal loan better than a credit card?

While credit cards offer a revolving line of credit, personal loans can provide a single, lump-sum payment directly to you that is paid back over a set period of time at a fixed rate.

Having a fixed interest rate coupled with fixed monthly payments and interest that does not compound over time means you’re saving money on accrued interest. Plus, you will know the exact date when your loan can be paid in full.

While the rates you receive on credit cards and loans depend on several factors, including your credit score and history, personal loans often offer lower rates than credit cards.

Many personal loans, like most offered through LendingClub, are unsecured rather than secured loans. As a result, there’s no need for you to put up collateral as an incentive for repayment. In other words, you don’t have to worry about losing your home, your car, or other valued possession if you happen to fall behind on your loan payments.

Personal loan vs. credit card: Which should you choose?

Because everyone’s financial situation is different, there’s no one-size-fits-all answer to whether a personal loan or a credit card is right. The only answer is: it depends.

Remember: A number of factors go into determining which credit cards and loans are actually available to you and what the terms for each look like. Your credit score is a major contributor, so if you want to get access to the most competitive loans and credit cards, be sure to work on beefing up your credit score.

Do you pay off your credit card balance every month?

As a general rule, if you’re able to pay off your credit card each month, the right card can offer many advantages. With many cards, you not only have convenience, but purchase protection, membership perks, select warranties, and travel and cash rewards. Not to mention, consistently paying your balance in full each month guarantees you never have to worry about the added costs of accrued interest.

Or do you carry a balance from one month to the next?

If you’re carrying a balance on a card right now and know you’re capable of knocking it out within a year or two, consider a balance transfer card. Many feature a 0% interest rate for a short period of time. So, if you can wipe out your debt before the promotional time ends, you’re in a position to save massively on interest costs. However, keep in mind that some cards charge transfer fees up to 5% of the balance transferred.

On the other hand, maybe you don’t qualify for a balance transfer card. Or perhaps you need a few years before you can pay down the debt you've accumulated. In that case, a balance transfer loan could be the right answer.

A balance transfer loan is a type of personal loan that offers great value in consolidating multiple debts, managing high-interest debt, and responsibly paying down creditors—often at lower rates. Plus, a balance transfer loan offers the convenience and savings of one single, easy-to-manage payment.

> Pro Tip: On average, many LendingClub members who choose a balance transfer loan see a 10-point increase in their credit score and can save nearly $900 over the course of their loan.1,2

Keep in mind that while a personal loan may help get you out of credit card debt, you will be paying more each month than what you were paying on your credit card minimums. If getting out of debt is your goal, that can be a good thing. But it's up to you to decide whether the higher monthly payment will be a strain on your finances.

The bottom line.

When it comes to dealing with debt, it pays to know your options. Before you make a decision, look at the interest rates, fees, and monthly payments associated with any credit card or loan offer. Use an online calculator to crunch the numbers and make the best choice for conquering your debt.

1Average credit score increase of 10 points considers the average change in credit score for balance transfer eligible members three months after issuance, comparing 66,366 members who were presented with and chose a balance transfer loan offer to 19,366 members who were presented with a cash loan offer from 07/01/2018–12/31/2018. If a customer increases their credit card balances after their loan is issued, they may not experience a higher credit score.

2Average savings is $895 and average loan size is $15,206 for balance transfer-eligible members. Savings compares a $15,206 loan with 11.77% interest (the average interest rate for 96,219 members who saw a balance transfer loan offer) with the same loan at 15.15% interest (the average interest rate for 25,671 members who saw a cash loan offer) from 07/01/2018 – 12/31/2018.

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