Is it advisable to opt for personal loan over a credit card? Here’s what you need to know | Mint

If you possess one or more credit cards and you have an urgent financial requirement to meet, then you can ideally choose one of the two options: either you can raise a loan, or you can make the payment through a credit card.

If you are in a dilemma as to which option to go for, then remember that both the options can be good during times when money is raised for a short period of time. But if you want to raise a loan for a long period, then one should keep in mind the following factors before taking a final call.

Personal loan over credit card:

I. Interest rate: The rate of interest charged by a bank on a personal loan is relatively lower than what they usually charge for a credit card. While you may get a personal loan for as low as 12 percent per annum, credit card charges an interest as high as 36 percent a year. 

So, there is a yawning gap in the interest rates charged by these two sources of finance.  

II. Credit limit: When you use the credit card for meeting an expenditure, your credit limit reduces. So, you should avoid exhausting it for the emergency.

III. Pre-approved offers: While you are about to use your credit card for meeting an expense, there could be a pre-approved loan offer waiting for you. You might want to use that instead.

IV. Cash withdrawal: A credit card is typically used only when you make online payments to a merchant. But to spend money in cash or via a debit card, you need money in hand.

If you are planning to withdraw cash via credit card then it is not recommended at all since it leads to an exorbitant interest.

VI. Credit score: When you use too much of your credit card, your credit utilisation ratio (CUR) suffers. And it is advisable to keep this ratio under 30 percent. 

For instance when your credit limit is ₹10 lakh, the ideal CUR is ₹ 3 lakh only. If you use the limit over and above this, your credit score stands to suffer.

VII. Amount: Credit card financing is typically for a smaller amount ( ₹5-10 lakh) whereas personal loan can be raised for a large amount also.   

(Note: Using a credit card carries its own set of risks)