Are Personal Loans or Credit Cards Better for Your Credit?

Any time you are considering taking on a debt, whether in the form of a credit card, personal loan, or something else, it is important to consider how that debt might impact your credit score. This can present a dilemma: should you take out a personal loan or get a credit card? How might these decisions affect your credit score?

Take a Look in the Mirror

Much of the decision to open a credit card account or take out a personal loan will depend on you. Neither is inherently better or worse than the other for your credit score — it isn’t merely having a personal loan or credit card that will affect your score. It’s all about how well you pay off the debt. When choosing between a personal loan and a credit card, here are some factors to consider: How much money do you need to borrow? Realistically, how long would you need to pay it off?

The Benefits of a Credit Card

Credit cards work best for short-term financing. They have high interest rates and should be used to pay for things that you’ll be able to pay off by the due date. Many credit cards come with additional perks, like bonuses or travel rewards for spending. If you don’t really have a pressing need to borrow money and simply want to establish a credit score or build upon your current credit score, a credit card can accomplish this better than a personal loan. Just remember to pay it off!

The Benefits of a Personal Loan

A personal loan is a strong option for borrowers who need longer-term financing, which could include anything from starting a small business to consolidating credit cards debts to paying for an adoption. Personal loans typically have low interest rates and work differently than a credit card. You will receive funds in a lump sum and arrange to pay them back with a given plan over a prearranged time period. If you aren’t able to pay off your balance in full, personal loans’ lower interest rates make them a more appealing option than a credit card.

Ultimately, the choice to get a personal loan or open a credit card, as well as how it will affect your credit score, begins and ends with you. Your personal financial needs and your knowledge of your ability to pay off a financial obligation should inform your decision.

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