Credit card vs loan: what’s the difference?

Read our guide to find out the key differences between credit cards and loans.

If you struggle to pay for everyday things, like shopping or bills, or you need to borrow money for a specific purchase, getting a loan or credit card might help. Lots of lenders still offer credit cards or loans to people with a low credit score (or no credit history at all), and they can be an excellent way to help your finances. This is especially true when the cost of living goes up. Here, we compare the two products to help you choose between them.

How does a credit card work?

A credit card lets you purchase items by borrowing money to pay for them. This money is lent to you from your lender through a credit card account set up by them. Your ‘maximum’ borrowing limit is also set by them. It might be a few hundred, or a few thousand pounds, and you can’t borrow more than this limit.

Each time you use your credit card, the amount is added to your balance. Interest is charged on this amount, but if you pay your balance every month, you won’t be charged interest.

Are you eligible for a credit card?

To be eligible for a credit card, lenders will need to carry out a credit check on you. This helps them decide whether your financial history and current situation make you suitable for having their credit card. Don’t worry if your credit history isn’t as good as you’d like or you don’t have any credit history, because you might be eligible for a special ‘credit building’ credit card designed for situations like yours.

The interest rate is set by your lender and depends on the type of product you choose. This interest rate is called the Annual Percentage Rate (APR), and it shows the monthly interest you will be charged, plus any fees that come with the card. The APR you receive can vary and depends on your own circumstances.

>Read more about APR

You’ll need to manage your credit card carefully to avoid getting into financial difficulties or debt. The best way to do this is to keep track of your spending and pay off the debt each month. If you can’t pay off the whole debt each month, at least try to pay off the minimum amount recommended by your lender, as shown on your statement. This will help you to avoid any fees or penalties for late or missed payments.

How does a loan work?

A personal loan is money that a lender lets you borrow from them in one lump sum. You can spend the money on anything, whenever you like, but you’ll need to pay interest (APR) however you use that money.

Loans will typically be for between £1,000 and £50,000, but you may find that lenders charge a higher rate of interest for smaller amounts.

Are you eligible for a loan?

As with a credit card, you should do an online eligibility check before you apply for a loan. This will tell you whether you’re entitled to take out a particular loan. Unlike a full credit check though, the eligibility check won’t show up on your credit history. People with no credit history or a poor credit history are often eligible to get special loans for bad credit.

You’ll need to repay the loan and its interest over a period called a ‘term’. A longer term may mean a higher rate of interest is charged. You can use the APR to look at loans from different providers to compare them and find the right one for you.

Loan repayments are made every month, and you can set up a Direct Debit to make sure you pay regularly and on time. Your repayment amount is made up of a payment towards the amount of the loan plus the interest being charged on the loan.

It’s important to make sure that you’ll be able to afford these monthly repayments. If you miss one, you’ll need to pay a penalty fee, and a record of the missed payment could damage your credit history and stay on your record.

The key differences between credit cards and loans

When you’re choosing between a personal loan and a credit card, you should think carefully about what you’ll use it for and how you’ll manage it. You should also sit down and do some careful sums to work out which option will be the cheapest for you overall. Be honest with yourself about how good you are at managing your money, spending within your limits and making any repayments on time.

Credit card

  • Good for smaller amounts.
  • Offers flexibility for repayments.
  • Provides some protection for consumers, especially useful if you’re buying online and goods are faulty or don’t arrive.
  • In some circumstances they can be used for debt consolidation.

Personal loan

  • Good for larger amounts.
  • You can usually choose how long you have to pay back the loan.
  • The interest you pay might be lower than with a credit card.
  • You’ll repay the same amount each month.
  • You might be able to make extra monthly repayments without a penalty.