Credit Cards vs Personal Loans vs Payday Loans

Credit Cards vs Personal Loans vs Payday Loans

Three of the most popular methods for borrowing a bit of extra cash are credit cards, personal loans and payday loans. Each of these loan types have their share of benefits and drawbacks, making them better suited to different financial circumstances.

Before you sign on any dotted lines, it’s worth getting an idea of what benefits each type of loan can offer, and finding out if there are any pitfalls worth keeping an eye out for:

Credit Cards

  • Useful for small or large borrowing
  • Flexible repayments
  • Option to earn benefits and rewards
  • Interest and fees can build up
  • Less ideal for very large expenses
  • Temptation to borrow more

Young woman on the beach phoning the bank for credit card support

What makes credit cards useful?

A credit card effectively functions as a flexible loan, allowing you to borrow money from a lender up to a predetermined limit. If you keep up to date with your repayments, you’ll always have the option to flash your fantastic piece of plastic to make payments in shops, over the phone, or online, even for international purchases and services.

It’s also possible to use a credit card to get cash advances from the bank, a bit like withdrawing money from your bank account via an ATM, though there are often extra costs involved.

Depending on your credit card provider, you may also be eligible to earn additional rewards and benefits by using your credit card, such as free travel insurance, or bonus points that can be redeemed at selected retailers.

How can you apply for a credit card?

Many lenders offer credit cards, ranging from major banks to independent credit providers. To apply, you’ll need some identification and evidence of income, to prove that you’ll be able to pay back any money you borrow from the lender. Your lender will also check our credit history, to determine the level of risk involved in lending to you.

What are the costs of a credit card?

Many lenders charge annual fees on their credit cards, as well as interest. Interest rates for credit cards tend to be on the high side, though depending on how you use your card, you may not always be charged for interest. 

Many credit cards come with a monthly interest-free period on purchases. If you make a purchase on your credit card as long as you repay this amount before the month’s interest-free period ends, you won’t be charged interest on the purchase. But if an amount is left outstanding, interest will be charged on this remainder, and you’ll lose the interest-free benefit for the next month until the card is full paid off.


Vlad has a credit card with a 45 day interest free period and a monthly billing cycle. He uses it to buy a new smartphone on the 1st of January. He has until the 14th of February (45 days from 1 Jan) to pay back the lender for his phone, or he’ll be charged interest on what he owes for January and lose the interest-free period for February.

Towards the end of January, Vlad want to replace his washing machine. He could use his credit card to buy a new one on the 31st of January, the last day of his billing cycle. However, because the interest-free period is calculated from the START of the billing cycle (e.g. 45 days from 1 Jan), he’ll need to pay back the value of his new washer to his lender by 14 Feb, just like his new smartphone, if he wants to avoid being charged interest on both his January and February purchases.

Vlad delays his washing machine purchase until 1 Feb, giving him until 17 March (45 days from the start of the new credit card billing cycle) to make his repayments and avoid interest charges.

What are the risks of a credit card?

Unlike many other types of loan, where you borrow a set amount of money then make steady progress towards getting this amount paid back plus interest by a certain date, credit cards tend to be a lot more flexible, which can be a problem as well as a benefit.

While you’re encouraged to fully repay your credit card each month, many lenders typically only require that you make a minimum repayment for a small percentage (often just 2%) of the outstanding balance you owe, plus interest charges. If you only make these minimum repayments, you’ll VERY slowly make progress towards clearing your debt, but you’ll likely end up paying a LOT of extra interest charges to your lender.

Also, because a credit card effectively functions as an open-ended loan, even if you’re already struggling to manage your repayments, you may still be tempted to borrow even more money. This could lead to you losing  and previous progress made towards repaying your loan, and getting you closer to being trapped in a cycle of inescapable debt.

Personal Loans

  • Good for making large purchases
  • Can consolidate other debt
  • Fixed borrowing keeps repayments manageable
  • Less flexible, fewer options
  • Risk of losing security
  • Extra fees could apply


What makes personal loans useful?

Personal loans are structured differently to credit cards or lines of credit. Rather than offering the flexibility to borrow any amount of money up to a fixed limit, and to then repay what you borrow as you go, personal loans involve borrowing a fixed sum of money that you receive from the lender up front, then making regular repayments over a set term to make sure that this amount ens up fully paid back to your lender, plus interest, on time.

This makes personal loans more useful for making large single purchases, such as buying a car, starting up a business, or paying for a dream wedding. They can also be used to consolidate multiple smaller debts (e.g. credit cards, payday loans) into a single, easy to manage loan, so you’ll only need to make the one repayment per month, and only be charged interest the once per month.

Because you can’t typically borrow more money and increase your level of debt with a personal loan, you should be able to make steady progress towards paying back what you owe, with less risk of ending up trapped in a bad financial position.

How to apply for a personal loan

Personal loans are available from a selection of banks and non-bank lenders, including some lenders that specialise in providing personal loans for borrowers with special needs, such as nonconforming personal loans for borrowers with bad credit.

Much like applying for a credit card, when you apply for a personal loan you’ll need to provide your personal details, plus evidence that you’ll be able to manage your loan repayments. Your lender will also check your credit history to determine the risk of lending to you.

Depending on the type of personal loan you apply for, you may also need to provide security to guarantee the sum you’re borrowing. For example, many car loans are guaranteed by the value of the car you’re buying, so if you don’t make your repayments, your vehicle will be repossessed and sold by the lender to cover its losses.


What are the costs of a personal loan?

Personal loans typically involve paying interest on the money you borrow, either at a fixed or variable rate. Fixed rates guarantee consistent repayments for the full term of the loan, for simpler budgeting, while variable rate loans usually offer greater flexibility, and may let you enjoy reduced repayments if your lender cuts its rates.  You may also need to pay establishment and/or ongoing fees on your personal loan.

The length of your personal loan term will make an impact on how much it will ultimately cost you in terms of interest and possibly fees. The shorter your loan term, the more expensive your monthly repayments will be, though you’ll pay less in interest and ultimately pay off your loan sooner. A longer loan term can make your monthly repayments more affordable, though the total interest and fees you’ll have paid by the end of your loan may be significantly higher. Some personal loans (often those with variable interest rates) include flexible features such as offset accounts and redraw facilities that provide extra options for managing your loan repayments, which may help you to reduce some of your interest costs in the right circumstances.

What are the risks of a personal loan?

Because personal loans need to be organised in advance, it’s usually straightforward for borrowers to work out whether they can afford the repayments before they sign on the dotted line. 

If your personal loan has a variable interest rate, there is a risk that the rate could rise, making your loan repayments more expensive. In such a case, you may need to consider the options for refinancing your personal loan, whether with your current lender or a different one.

The greatest risk to keep in mind when you take out a personal loan is being stung with surprise fees, which (depending on your lender) may be charged if you choose to exercise some of your loan’s optional features. You may also be charged penalty fees if you make extra repayments or complete your loan early, to make up for the interest charges the lender will miss out on.

Also, if you opt for a secured personal loan and don’t keep up with your repayments, you may risk losing your security asset, whether that’s your car, your property, or even just a bank deposit.

Payday Loans

  • Fast cash in a pinch
  • Handy for small purchases
  • Simple to apply for
  • Interest + fees add up quickly
  • Temptation to borrow more
  • Tough penalties for defaults


Why are payday loans useful?

The typical example scenario for a payday loan goes something like this:


Janice’s family fridge has broken down, right in the middle of a summer heatwave. She needs a new replacement right now, but all the money from her last payday has already been accounted for, covering bills and life’s other expenses. She’d easily be able to afford a replacement in a month’s time, but that’s not going to save the rapidly-defrosting food she needs to feed her family right now!

By approaching a payday lender, Janice can get a small loan approved in a matter of minutes, allowing her to pick up a new fridge that very day and rescue her melting ice cream. When Janice’s next payday arrives, she can pay back the loan, plus any fees and charges, and get on with her life.

How to apply for a payday loan:

Most payday lenders can be quickly contacted by phone or online to make an application. This application is usually faster and less involved than the process of applying for a credit card or a personal loan, though you’ll still need to provide your personal details and some evidence of income to show that you’ll be able to afford to pay the lender back. 

Your payday lender will then confirm your details and perform a credit check. Payday lenders tend to be more flexible around bad credit than many larger lending organisations, but if your credit history clearly shows major financial problems, your application may be declined. 

Once your payday loan application has been approved, you’ll often be able to receive your funds very quickly, sometimes literally within a matter of minutes. 

What are the costs of payday loans?

Unlike credit cards and personal loans, payday loans don’t charge interest on the amount you borrow – only fees. However, these fees are usually listed in percentages, based on the amount you owe, similar to interest rates. 

Current Australian government legislation requires that establishment fees charged at the start of a payday loan can only total up to 20% of the loan principal (e.g. for a $600 loan, there can be a maximum establishment fee of $120). On top of this, the monthly ongoing fees can only total a maximum of 4% (e.g. for a $600 loan, the ongoing fee can be a maximum of $24 per month). Payday loans tend to have fairly short terms, often ranging from as little as 2 weeks to as much as 12 months.

What are the risks of payday loans?

Payday loans provide fast and simple access to money, which can prove very tempting to people who are already experiencing financial stress, and are thus the most vulnerable to extra costs, fees and charges. Even if you only borrow a small amount of money from a payday lender, if your finances are already tight, there’s a big risk of ending up in more debt that you can realistically handle if you’re not careful, or if you experience some bad luck (e.g. having to pay for car repairs after you’ve already taken out a loan for your new fridge). It just takes one missed repayment to find yourself slapped with steep penalty fees, which can quickly add up, leaving you in real financial trouble.

The best precaution when thinking about payday loans is to take some extra time to look carefully at all the terms and conditions involved, work out a budget to see if you’ll be able to realistically afford the extra fees and charges, and decide whether you think these extra costs will be worth it. Taking this extra time to consider your options may mean you won’t get your hands on that money quite as fast as simply applying for a payday loan, but avoiding the extra risk of ending up with problem debt is often worth it. 

Also, try to avoid using payday loans as a “stopgap” solution for managing repayments on larger debts, such as overdue credit cards or personal loans. Borrowing more money could allow you to avoid a late repayment now, but won’t fix the root problem, and could leave you in even more debt trouble further down the line.

If you ever find yourself struggling with any loan repayments, contact your lender to find out your available options. Alternatively, contact MoneySmart for free financial counselling, or call Australia’s National Debt Helpline on 1800 007 007.

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Learn more about credit cards

Can I get a credit card on part-time/casual work?

Yes, as credit card providers look at your annual income amount as well as your occupation. Minimum income requirements tend to be between $30,000 – $40,000 for standard and rewards credit cards, however low income credit cards can have minimum income requirements as low as $15,000 per year.

How to get rid of credit card debt

  1. Calculate your debt. Credit card calculators make it easy to determine the repayments required to chip away at your debt in the shortest timeframe possible for your budget.
  2. Repayment plans. Take some time to formulate a credit repayment plan. Consider increasing your income, scaling back your lifestyle or refinancing.
  3. Talk to your credit provider. If you’re still struggling with your debt, give your credit provider a call. You may be able to come to a new arrangement.

How to get money from a credit card

You can get money from a credit card, but generally it will cost you.

Withdrawing money from a credit card is called a cash advance, as it operates more as a loan than a simple cash withdrawal. Because it is a loan, you may be charged interest on your cash advance as soon as you make the withdrawal. Interest rates are also usually much higher for cash advances than standard credit card purchases.

In addition to the interest rate, you may also be charged a cash advance fee. This could be a flat rate, or a percentage of your total cash advance. If you are considering a cash advance, make sure to add up how much it will cost you before committing.

How long does it take to get a credit card?

There are a few stages you need to go through to get a credit card; each one takes a different length of time.

Applying for the card online, over the phone or in person is the fastest step. This usually takes around 15 minutes, provided you have all of your documents handy.

After submitting your application, it usually takes between one to 10 business days for the lender to assess your eligibility. Some lenders offer instant approval, although you will need to send supporting documents before it is official.

Once your application has been approved, expect to wait between one to 14 days to receive your card in the mail. Keep in mind that delays can happen during busy periods, such as if the lender has launched a special deal.

How to get cash with just a credit card number

Banks and merchants usually will not allow you to access cash without a physical card, because doing so would open up opportunities for fraudulent activities. Even most non-cash credit card transactions (such as shopping online) require you to know the expiry date and CVV on your credit card in addition to the card number.

However, some banks offer cardless cash for transaction accounts. Using a secure app installed on your mobile phone, you can log onto an ATM and withdraw the money you need. This could be a practical and secure solution if you don’t have a card and need cash.

Is instant approval possible for credit cards?

Instant approval may be possible – but please note that the term may be misleading. “Instant” approval tends to mean that when you apply online the lender will let you know the likeliness of your eligibility for a credit card within 60 seconds of receiving your application.

Are credit checks mandatory?

In Australia it is impossible to get a credit card without the provider performing a credit check first. This is for your benefit, as it helps to prevent you from falling into avoidable debt.

What is the lowest monthly repayment on my credit card?

As a rule of thumb, this tends to be around 2-3 per cent of the outstanding balance. You can choose how much you want to repay each billing period as long as it is higher than this minimum required amount.

How do you apply for a credit card?

You can apply for a credit card online, over the phone or in person at the bank. Once you’ve compared the current credit card offers, the application process is quick and easy. Before you get your application started, you’ll need to gather your personal information like proof of ID, payslips and bank statements, proof of employment and details of your income, assets and liabilities. To be eligible for a credit card, you’ll need to be an Australian citizen over 18 and earn a minimum of $15,000 each year. Once you’ve applied for a credit card, you should get a response fairly instantly. If your credit card application has been approved, you should receive a welcome pack with your new credit card within 10-15 days.

How to pay a credit card

There are a few ways to pay a credit card bill. These include:

  • BPAY - allows you to safely make credit card payments online.
  • Direct debits - set up an automatic payment from your bank account to pay your credit card bill each month. You can choose how much you want to pay of your credit card bill when you set up the auto payments.
  • In a branch.
  • Via your credit card provider's app.

What is CVV on a credit card?

CVV stands for ‘card verification value’, and is also sometimes referred to as a CVC or card verification code.

A CVV code is usually needed when the card is used online or over the phone as an anti-fraud measure. Without the cardholder being physically present to sign or verify the purchase, the CVV provides an extra layer of protection. 

If you’re using Mastercard or Visa, the CVV is the three digits located on the back of the card. If you’re using an American Express, the CVV is usually four digits and is on the front of the card.

Do you need a credit card to get a loan?

You do not need a credit card to get a loan, but you usually need to have a credit history. Without a credit history, a financial institution cannot assess your ‘credit worthiness’, or your capacity to pay off the loan.

If you don’t have a credit card, your credit history can reflect any record of paying off an asset. Without any credit credit history, you’re limited in the type of loans you can apply for. But you may be able to obtain a secured loan against an asset. For more information on improving your credit score, go here

How do you use credit cards?

A credit card can be an easy way to make purchases online, in person or over the phone. When used properly, a credit card can even help you manage your cash flow. But before applying for a credit card, it’s good to know how they work. A credit card is essentially a personal line of credit which lets you buy things and pay for them later. As a card holder, you’ll be given a credit limit and (potentially) charged interest on the money the bank lends you. At the end of each billing period, the bank will send you a statement which shows your outstanding balance and the minimum amount you need to pay back. If you don’t pay back the full balance amount, the bank will begin charging you interest.

How is credit card interest charged?

Your credit card will be charged interest when you don’t pay off the balance on your credit card. Your card provider or bank charges you the individual interest rate that is associated with your card, which is usually between 10 and 20 per cent. 

The interest will be added onto your bill each month or billing period if you don’t pay off the balance, unless you are in an interest-free period.

You will be charged interest on anything that hasn’t been paid for inside the interest-free period. Usually you will receive a notice on your bill or statement saying you will be charged interest so you have some form of notice before you’re charged.