Credit card or personal loan? How to choose Personal loans are cheaper but credit cards are more flexible. PLASTIC fantastic or personal loan - the debate over which is the best way to borrow has never been greater. Credit cards are quick and easy to use but their popularity is waning. Personal loans are less flexible but often cheaper. The best choice depends on what you plan to spend the money on and your personal discipline when it comes to making repayments. And spend, we do. Australians currently have almost $100 billion debt stacked up on credit cards and personal loans. "There are pros and cons to both credit cards and personal loans," RateCity spokeswoman Michelle Hutchison says. They can be useful ways of accessing money and they have different features that can suit different circumstances. For instance, credit cards are more of a line of credit-style account when you access money as you need it. While personal loans are often provided as one lump sum to pay for a particular purchase. Both types of borrowing have a downside. These may include penalties and fees, and they need to be handled with caution. According to the Australian Prudential and Regulation Authority, at December 2012 personal loans totalled $58.6 billion and $40.8 billion was outstanding on credit cards.Hutchison says lenders are charging interest rates at an average of 13 per cent for personal loans and 17 per cent for credit cards. Count the cost Credit union Community CPS Australia chief financial officer Wayne Matters says personal loans often have a lower interest rate than credit cards and their repayment schedule usually means the debt is eventually fully repaid. "The key difference between credit cards and personal loans is that loans are cheaper in the long run and impose greater strictness, with repayments that will result in clearing the debt within the agreed time frame," Matters says. Temptation to keep spending is also limited as only a few loans offer redraw options. So for larger, one-off purchases such as furnishing a new home, minor home improvement or taking an overseas holiday, a personal loan can be a very effective option. In contrast, credit cards are a convenient form of credit that allow immediate spending. A decision to use credit cards should be based on whether you have the cash flow to repay the amount quickly and whether you are likely to keep spending and go further in to debt. Consolidating debt CreditCardFinder.com.au publisher Jeremy Cabral says the best option when consolidating debts is to consider your repayment ability before making a decision between a personal loan or credit card. "If you are looking to consolidate debt and you have a strict repayment plan that you will follow, it is possible to get a lower interest rate with a credit card balance transfer," he says. However, if you are looking for a 'set and forget' option for a large debt, that will take a number of years to repay, a personal loan is worth considering instead. Be disciplined Anna Flower, district manager for ANZ's branch network, says people who opt for a credit card should try to pay more than their monthly minimum repayment or pay the balance in full each month to avoid fees and interest. "Some personal loans allow you to make extra repayments to help you pay off your loan faster and save you interest," she says. But you need to be disciplined as you often have the ability to redraw your extra repayments, which can reduce the amount of interest you save in the long run. Always make regular repayments and consider setting up a direct debit. Type of purchase The type of purchase is often the key to whether a credit card or personal loan will work best. "The key factor is the amount of the purchase and whether or not you are going to be able to repay the amount within the introductory period on a credit card - the larger the purchase, the more sensible it is to consider a personal loan," Cabral says. Credit cards are more convenient for retail purchases as they can be used immediately and over the counter. A personal loan facility has to be set up in advance. However, for larger items, personal loans are often better.