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There are two basic types of credit: installment and revolving. An installment loan is a form of installment credit that is closed-ended and is repaid in fixed payments over a regular repayment schedule.

Some common types of installment loans are mortgages, auto loans, student loans, and personal loans. If you’re considering borrowing money, learn more about installment loans and how they work here.

What Is an Installment Loan?

An installment loan is a lump sum of money borrowed and paid back over time. Each payment is referred to as an installment, hence the term installment loan.

In contrast, revolving credit like credit cards can be borrowed, repaid, and borrowed again up to the approved credit limit.

Installment loans can be secured with collateral or they can be unsecured. Some loans may have fees and penalties. The interest rate may fluctuate, depending on whether you choose a fixed or variable rate loan.

Recommended: Personal Loan Calculator

What Is an Example of an Installment Loan?

Installment loans can have multiple uses. These include auto loans, personal loans, mortgages, and student loans.

Auto Loans

Borrowers can take out auto loans for new and used vehicles. Monthly installments average around 72 months, but shorter loans may be available.

Loans with longer terms tend to have higher interest rates. It may seem like you’re paying less because the monthly payments may be lower, but you could end up paying more over the life of the loan.

Mortgages

Mortgages, or home loans, typically have terms ranging from 10 to 30 years with installments paid back monthly. Depending on your mortgage, you’ll either pay a fixed interest rate — it won’t change throughout your loan — or variable, which can fluctuate after a certain period of time.

Personal Loans

Personal loans are more flexible types of loans in that borrowers can use them for most purposes — examples include home repairs or debt consolidation. Many personal loans are unsecured, and interest rates will depend on your credit history and other factors.

Recommended: What Is a Personal Loan?

Student Loans

Student loans help borrowers pay for their post-secondary education such as undergraduate and graduate tuition costs. They’re either federal or private, and terms and rates will depend on a variety of factors. (With private loans, you can’t access the protections of federal student loans, such as deferment and forbearance, for example.)

Some student loans have a grace period, a period after graduation during which you aren’t required to make payments. Depending on how the loan is structured, interest may not accrue. Not all student loans have a grace period, however, so it’s important to verify your repayment schedule before you finalize the loan.

Pros and Cons of Installment Loans

An installment loan may or may not be the best fit for your borrowing needs. Consider the advantages and disadvantages, so you understand what you’re agreeing to.

Pros of Installment Loans

Here are the upsides of installment loans:

Expense

Most installment loans allow borrowers to take out large amounts, helping them to cover large expenses. For instance, many borrowers can’t afford to buy a house with cash, so mortgages can provide a path to homeownership.

Regular Repayments

Installment loans tend to come with predictable payment schedules. If you take out a fixed-rate loan, your payment amount should be the same each month. Having that knowledge of when and how much you need to pay can make it easier to budget.

Plus, installment loans have a payment end date. As long as you keep making on-time payments, your loan will be paid off in a certain amount of time.

Taking a careful look at your budget to make sure you can afford the monthly payments is an important consideration.

Refinancing

You may be able to refinance your loan to a lower rate if you’ve built your credit or if interest rates go down. Refinancing may shorten your loan repayment schedule or lower your monthly payments.

There are typically fees associated with refinancing a loan, which is another thing to consider when thinking about this option.

Cons of Installment Loans

Next, consider the potential downsides of installment loans:

Not Open-Ended

Once you finalize the loan and receive the proceeds, you can’t borrow more money without taking out another loan. Revolving credit like credit cards allow borrowers to use funds continually — borrowing and repaying up to their credit limit.

Commitment

When you take out a loan, being committed to paying it down is essential. Since some installment loans can come with longer terms — think mortgages — it’s important to make sure your budget can handle the regular payment.

Charged Interest

Like other types of loans, you’ll need to pay interest on installment loans. The interest rate you’re approved for is dependent on factors such as your credit history, credit score, and others. Applicants who have a longer credit history and a credit score at the higher end of the range will most likely qualify for the most competitive rates. If you’re stuck with a higher rate because of your poor credit, you could be making larger payments and paying more in interest.

Aside from interest, you may have to pay fees to take out an installment loan. There may also be prepayment penalties if you want to pay off your loan early.

Installment Loans and Credit Scores

How you use an installment loan can affect your credit score. If a lender reports your activity related to the loan, it could affect your score in two ways:

•   Applying for a loan: A lender may want to check your credit report when you apply for a loan, which may trigger a hard credit inquiry. Doing so could temporarily lower your credit score.

•   Paying back a loan: Lenders generally report your activity to the three major credit bureaus. If you make regular, on-time payments, this positive mark on your credit report could raise your credit score. The opposite can happen if you’re behind on or miss payments.

💡 Recommended: Installment Loan vs Revolving Credit

Getting an Installment Loan

Since taking out an installment loan is a big financial commitment, you may want to consider the following best practices:

•   Shopping around: Getting quotes from multiple lenders is a good way to compare personal loans to find one that offers the best rates and terms for your financial profile.

•   Prequalifying for loans: Getting pre-qualified allows you to see what rates and terms you may qualify for without it affecting your credit score.*

•   Enhancing your borrowing profile: Check your credit report for any errors or discrepancies. Making corrections could have a positive effect on your credit score.

•   Adding a cosigner: If you can’t qualify for an installment loan on the merits of your own credit, you may consider asking someone you trust and who has good credit to be a cosigner.

Alternatives to Installment Loans

Here are a few alternatives to consider:

•   Using a credit card: If you don’t need a large sum of money or don’t know how much you’ll need to borrow, a credit card can be a smart choice. Paying the entire balance by the due date means you won’t have to pay interest. Paying at least the minimum amount due each month will keep you from incurring a late fee, but you’ll still pay interest on any outstanding balance.

•   Borrowing from your next paycheck: Some apps let you receive an advance on your next paycheck, if you meet qualifications. You agree to pay the advance back when your next paycheck is deposited into your bank account.

•   Borrowing from friends or family: Asking to borrow money can be an uncomfortable conversation to have. However, it may be an option if you can’t qualify for or would rather not take out a bank loan. Having a written agreement outlining each party’s expectations and responsibilities is a good way to minimize miscommunication and hurt feelings.

Recommended: Family Loans: Guide to Borrowing & Lending Money to Family

The Takeaway

If you’re looking for a loan, an installment loan might fit your needs. This is a loan that disburses a lump sum, which is then paid back over time. Shopping around for an installment loan is a good way to find the best rates and terms for your unique financial situation and needs.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is the meaning of installment loan?

An installment loan is a type of loan where borrowers take out a lump sum of money and pay it back in installments. Loan amounts can range from hundreds to thousands of dollars, and terms range from a few months to a few years.

What is an example of an installment loan?

Examples of installment loans include auto loans, personal loans, mortgages, and student loans.

Are installment loans bad for credit?

Making your scheduled monthly payments on time could build your credit score. On the flip side, late or missed payments can hurt your credit score.

What is the difference between a personal loan and an installment loan?

Personal loans are types of installment loans. Other types include student loans, mortgages, and auto loans.

Photo credit: iStock/Ridofranz

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-025

Credit cards can be a convenience for daily spending or buying a big-ticket item (a new laptop or fridge), but they have downsides, too. Perhaps most notably, they have high interest rates. As of October 2025, one analysis found that the average interest rate was just over 20%. That can make paying off debt a challenge, and balances can rise steeply.

Here, you’ll learn more about how and why credit card payments can balloon as interest rates rise. You’ll also read advice on keeping your credit card in check, which can benefit your financial wellness.

How Interest Is Calculated

If you’re confused by all of the fine print that accompanies a credit card offer or the thought of an annual percentage rate (APR) calculation makes you wince, you probably aren’t the only one. To understand how rising rates can affect your credit card payment, it helps to understand a bit about how credit card interest is calculated.

•   First, there are two types of consumer loans: installment loans and revolving credit. A mortgage, student loan, or car loan are all examples of installment loans. With an installment loan, the borrower is loaned an amount of money (called the principal), plus interest to be paid back over a designated amount of time.

•   Revolving credit, on the other hand, is not a loan disbursed in one lump sum, but is a certain amount of credit to be used by the borrower continuously, up to a designated limit. A credit card is revolving credit. A borrower’s monthly payment is determined by how much of the available credit they are using at any given time; therefore, minimum payments may change from month to month.

Installment credit is sometimes easier than revolving credit to understand and calculate. First, installment loans often come with fixed rates, which means that the interest rate doesn’t change (unless you miss payments). For example, the rate on a federal student loan or a 30-year fixed mortgage won’t change, even if government-set interest rates shoot to the sun.

Revolving credit almost often has a variable rate, which means that the interest rate applied to the credit balance fluctuates.

The average rate on credit cards is quoted as an annual percentage rate, or an APR. The APR is the approximate interest rate that a borrower will pay in one year. Why approximate? The prime rate could fluctuate based on when the Fed changes the federal fund target rate.

How Credit Card Interest Rates Change

Generally, when the Fed raises the federal funds rate, it can slow economic growth because it dissuades banks from lending money — and discourages consumers from borrowing at a subsequently higher interest rate. Raising rates is also used as a technique to combat rising inflation.

While this may be a normal and natural part of an economic cycle, rising rates can be frustrating for anyone who is currently carrying a credit card balance.

In October 2025, the average credit card interest rates were falling slightly due to interest rate cuts by the U.S. Federal Reserve, but they remain near historic highs. While lower rates are helpful, small decreases in interest may not significantly impact the debt some people carry.

What Does a Rising Prime Rate Mean for Credit Card Holders?

A change in interest rates is likely to impact anyone with a variable rate on their credit card balance. When the Fed raises federal funds interest rates, it can be expected that credit card interest rates may follow. (Similarly, when rates are cut by the Fed, credit card rates often decline.)

How much would your credit card interest rate increase if the Fed raises rates? It depends on your credit card. Generally, credit cards move in sync with rate hikes, which usually happen in quarter-percent increments.

How to Combat a High Credit Card Bill

Here are some ideas for battling a high credit card bill and potentially paying less in interest over time:

1. Pay More Than the Minimum Payment

If at all possible, pay off as much of your credit card balance as you can each month. Making payments greater than the minimum amount due can help reduce your balance. The faster you can work on reducing the actual principal balance on your credit card, the less interest you’ll likely pay. If you only pay your credit card’s minimum payment, you may wind up in debt longer and spend more on interest in the long run.

2. Switch to a Balance Transfer Card

Balance transfer credit cards typically have 0% APR introductory offers lasting for several months to a couple of years. If you’re serious about getting rid of your debt, you could transfer your debt over to one of these cards and then actively work on paying off the debt while you’re not paying interest.

If you do this, make sure to look for a card that has no transfer fee. Beware: If the root of the problem is actually overspending, this will not be a good long-term solution. Sometimes, 0% APR cards have interest rates that jump up dramatically after the trial period is over. And the 0% APR may no longer apply if you make a new purchase on the card.

3. Negotiate a Lower Rate

You might be surprised to find out that a credit card rate can be negotiable. It may be worth giving your credit card company a call and seeing whether they can reduce your rate.

When talking to the person on the other end of the line, explain your situation, be kind to them, and see what happens. Again, this isn’t a permanent solution or a guaranteed outcome, but it could help give you a leg-up on the payback journey.

4. Sign up for Credit Counseling

You might benefit from professional credit counseling to help with your credit card debt. The National Foundation for Credit Counseling (NFCC) is a nonprofit organization that offers free and affordable advice for people who are struggling to manage debt on their own. If you’re unable to envision a path to paying down debt, it could be a good idea to ask for assistance.

5. Consider a Personal Loan

One tactic to consider in an environment where prime interest rates are rising is paying off credit card balances with a fixed-rate unsecured personal loan.

These are sometimes referred to as “debt consolidation loans” and allow a qualified borrower to pay off high-interest debt, such as credit cards, with this lower-rate personal loan. With a fixed-rate personal loan, the rate never changes (as long as payments are made on time), and it helps provide the borrower with a defined plan to pay off the debt.

If you decide to go this route, it’s a good idea to shop around to ensure that you’re getting a fair rate. You can get a personal or debt consolidation loan from banks, credit unions, and online lenders.

To compare estimated personal loan interest charges to credit card interest charges, you can use a tool like a personal loan calculator.

The Takeaway

When the Fed raises interest rates, credit card payments can rise as well. If credit card debt becomes an issue, you can secure a 0%-interest credit card, access credit counseling, or consider a credit card debt consolidation loan, among other options.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is the 2-3-4 rule for credit cards?

The 2-3-4 rule for credit cards is a guideline from card issuers that limits the number of new credit card applications you can be approved for over a specific time period. It restricts applicants to no more than two new credit cards within a 30-day period, three new cards within a 12-month (one year) period, and four new cards within a 24-month (two-year) period.

What is the 15/3 rule for credit cards?

The 15/3 rule is a credit card method that involves making two payments each month: a larger one about 15 days before the statement closing date plus a smaller one three days before the due date. This can help reduce your credit utilization ratio by reducing the balance reported to credit bureaus.

Is a 700 credit score rare?

A 700 credit score is not considered especially rare. It falls within the “good” range and is slightly below the average credit score in the U.S. A score of 700 is ahead of approximately 40% of consumers who have scores below 700.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-022

The prime interest rate is the interest rate that banks charge their best customers. It’s the lowest rate offered to individuals and corporations that are considered low risk by banks — those with good credit history who aren’t likely to miss payments or default on their loan.

But when you run into the term “prime interest rate” in your daily life (maybe you’re taking out a personal loan or applying for a mortgage), it’s pretty common to feel a little confused. To get a better handle on this financial term and know how it relates to your money, read on.

How Is the Prime Interest Rate Set?

You’ve just learned that the prime interest rate is the rate that banks charge their best customers. Take a closer look at how the prime interest rate is set, as well as how this figure fits into the larger financial landscape.

Individual banks determine their prime interest rate. While the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate.

The federal funds rate is the rate that banks charge each other on an overnight basis and is established by the Federal Open Market Committee.

Why do banks lend each other money? They do so in order to meet the reserve requirement, which is also set by the Federal Reserve.

This is the minimum amount of cash a bank must have in their vault or at the closest Federal Reserve bank. If one bank has excess cash, the bank has a financial incentive to lend that excess cash to a bank that has less than its federally mandated amount. The reserve requirement acts as a lending limit for banks and also ensures that they have enough cash on-hand for the start of business each day.

How Does the Prime Rate Compare?

Generally, the prime rate is about three percent higher than the federal funds rate. That means that when the Fed raises interest rates, the prime rate typically goes up as well.

Because the prime interest rate is typically aligned with the federal funds rate, it’s highly susceptible to change. How often could the prime rate change? It can shift quite a bit. Take, for instance, the fact that the prime rate was 3.25% on March 16, 2020. From that date to July 2023, it rose 11 times to 8.50%. As of October 30, 2025, the prime rate was 7.00%.

Why Is the Prime Interest Rate Important?

The prime interest rate impacts all kinds of loans, including interest rates for mortgages, credit cards, auto loans, and personal loans. Typically, banks and lenders will use the prime interest rate as a benchmark for setting interest rates for their customers. Consider some of the ways this can impact personal finance and the economy:

•  Changes in the federal funds rate and prime interest rate can impact variable rate credit cards, adjustable-rate mortgages, home equity lines of credit (HELOC), and more. The interest rates on variable loans are based on these market interest rates and therefore change over time. In fact, variable interest rates, including those on credit cards, are often expressed as the prime rate plus a certain percentage.

Unlike fixed-rate loans, monthly payments on any variable loan could change considerably from month-to-month. This is why fixed-rate loans can be a more desirable alternative than variable loans for some borrowers.

•  Though rates are largely influenced by the Federal Reserve, borrowers have little control or way of predicting the rates from year to year. Even when the Federal Reserve predicts growth, interest rates can rise due to a variety of factors, causing your monthly bill to rise with it.

•  Beyond individual borrowers, the prime interest rate also influences the financial market as a whole. A low prime rate makes it easier and less expensive to borrow loans which increases liquidity in the market.

•  Historically, when the prime rate is low, the economy grows. That’s why, if there’s a recession, rates may go down, with the goal of getting consumers and businesses to borrow again and stimulate the economy.

When the prime rate is high, economic growth slows down. For instance, recently interest rates were raised, which can nudge consumers to think twice about spending. This can lower demand and help bring down inflation’s impact.

•  The prime rate isn’t the only benchmark that banks use to inform interest rates. Banks also often use the SOFR, or Secured Overnight Financing Rate, which replaced the London Interbank Offer Rate (LIBOR). This reflects the rate that banks charge each other for short-term loans. The federal funds rate, prime interest rate, and SOFR rates generally fluctuate together. When the three rates are out of sync, this can be an indicator of an issue with the financial markets.

Recommended: How to Apply for a Personal Loan

The Takeaway

The prime interest rate is defined as the interest rate that banks charge their best customers who are considered low risk by banks. Interest rates play an important role when you are borrowing funds to finance an expense, so it pays to pay attention to them and shop around for the most favorable offer you can find.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

What is the prime interest rate?

The term prime interest rate refers to the interest rate that banks charge their best customers, whether they are individuals or businesses.

What is the current prime interest rate?

At the end of October 2025, the prime interest rate was 7.00%.

What is the current interest rate for the Fed?

The St. Louis Fed reported the effective federal funds rate was 4.12% as of October 27, 2025.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-021

Both personal loans and credit cards provide access to extra funds and can be used to consolidate debt. However, these two lending products work in very different ways.

A credit card credit is a type of revolving credit. You have access to a line of credit and your balance fluctuates with your spending. A personal loan, by contrast, provides a lump sum of money you pay back in regular installments over time. Generally, personal loans work better for large purchases, while credit cards are better for day-to-day spending, especially if you are able to pay off the balance in full each month.

Here’s a closer look at how credit cards and personal loans compare, their advantages and disadvantages, and when to choose one over the other.

Personal Loans, Defined

Personal loans are loans available through banks, credit unions, and online lenders that can be used for virtually any purpose. Some of the most common uses include debt consolidation, home improvements, and large purchases.

Lenders generally offer loans from $1,000 to $50,000 or $100,000, with repayment terms of two to seven years. You receive the loan proceeds in one lump sum and then repay the loan, plus interest, in regular monthly payments over the loan’s term.

Personal loans are typically unsecured, meaning you don’t have to provide collateral (an asset of value) to guarantee the loan. Instead, lenders look at factors like credit score, debt-to-income ratio, and cash flow when assessing a borrower’s application.

Unsecured personal loans typically come with fixed interest rates, which means your payments will be the same over the life of the loan. Some lenders offer variable rate personal loans, which means the rate, and your payments, can fluctuate depending on market conditions.

Personal loans generally work best when they are used to reach a specific, longer-term financial goal. For example, you might use a personal loan to finance a home improvement project that increases the value of your home. Or, you might consider a debt consolidation loan to help you pay down high-interest credit card debt at a lower interest rate.

Recommended: Personal Loan Calculator

Key Differences: Credit Card vs Personal Loan

Both credit cards and personal loans offer a borrower access to funds that they promise to pay back later, and are both typically unsecured. However, there are some key differences that may have major financial ramifications for borrowers down the line.

•   Unlike a personal loan, a credit card is a form of revolving debt. Instead of getting a lump sum of money that you pay back over time, you get access to a credit line that you tap as needed. You can borrow what you need (up to your credit limit), and only pay interest on what you actually borrow.

•   Interest rates for personal loans are typically fixed for the life of the loan, whereas credit cards generally have variable interest rates. Credit cards also generally charge higher interest rates than personal loans, making it an expensive form of debt. However, you won’t owe any interest if you pay the balance in full each month.

•   Credit cards are also unique in that they can offer rewards and, in some cases, may come with a 0% introductory offer on purchases and/or balance transfers (though there is often a fee for a balance transfer).

Line of Credit vs Loan

A line of credit, such as a personal line of credit or home equity line of credit (HELOC), is a type of revolving credit. Similar to a credit card, you can draw from a line of credit and repay the funds during what’s referred to as the draw period. When the draw period ends, you’re no longer allowed to make withdrawals and would need to reapply to keep the line of credit open.

Loans, such as personal loans and home equity loans, have what’s called a non-revolving credit limit. This means the borrower has access to the funds only once, and then they make principal and interest payments until the debt is paid off.

Consolidating Debt? Personal Loan vs Credit Card

Using a new loan or credit credit card to pay off existing debt is known as debt consolidation, and it can potentially save you money in interest.

Two popular ways to consolidate debt are taking out an unsecured personal loan (often referred to as a debt or credit card consolidation loan) or opening a 0% interest balance transfer credit card. These two approaches have some similarities as well as key differences that can impact your financial wellness over time.

Using a Credit Card to Consolidate Debt

Credit card refinancing generally works by opening a new credit card with a high enough limit to cover whatever balance you already have. Some credit cards offer a 0% interest rate on a temporary, promotional basis — sometimes for 18 months or longer.

If you are able to transfer your credit card balance to a 0% balance transfer card and pay it off before the promotional period ends, it can be a great opportunity to save money on interest. However, if you don’t pay off the balance in that time frame, you’ll be charged the card’s regular interest rate, which could be as high (or possibly higher) than what you were paying before.

Another potential hitch is that credit cards with promotional 0% rate typically charge balance transfer fees, which can range from 3% to 5% of the amount being transferred. Before pulling the trigger on a transfer, consider whether the amount you’ll save on interest will be enough to make up for any transfer fee.

Using a Personal Loan to Consolidate Debt

Debt consolidation is a common reason why people take out personal loans. Credit card consolidation loans offer a fixed interest rate and provide a lump sum of money, which you would use to pay off your existing debt.

If you have solid credit, a personal loan for debt consolidation may come with a lower annual percentage rate (APR) than what you have on your current credit cards. For example, the average personal loan interest rate as of late 2025 is 12.25% percent, while the average credit card interest rate is now 20.03%. That difference should allow you to pay the balance down faster and pay less interest in total.

Rolling multiple debts into one loan can also simplify your finances. Instead of keeping track of several payment due dates and minimum amounts due, you end up with one loan and one payment each month. This can make it less likely that you’ll miss a payment and have to pay a late fee or penalty.

Both 0% balance transfer cards and debt consolidation loans have benefits and drawbacks, though credit cards can be riskier than personal loans over the long term — even when they have a 0% promotional interest rate.

Is a Credit Card Ever a Good Option?

Credit cards can work well for smaller, day-to-day expenses that you can pay off, ideally, in full when you get your bill. Credit card companies only charge you interest if you carry a balance from month to month. Thus, if you pay your balance in full each month, you’re essentially getting an interest-free, short-term loan. If you have a rewards credit card, you can also rack up cash back or rewards points at the same time, for a win-win.

If you can qualify for a 0% balance transfer card, credit cards can also be a good way to consolidate high interest credit card debt, provided you don’t have to pay a high balance transfer fee and you can pay the card off before the higher interest rate kicks in.

With credit cards, however, discipline is key. It’s all too easy to charge more than you can pay off. If you do, credit cards can be an expensive way to borrow money. Generally, any rewards you can earn won’t make up for the interest you’ll owe. If all you pay is the minimum balance each month, you could be paying off that same balance for years — and that’s assuming you don’t put any more charges on the card.

When Is a Personal Loan a Good Option?

Personal loans can be a good option for covering a large, one-off expense, such as a car repair, home improvement project, large purchase, or wedding. They can also be useful for consolidating high-interest debt into a single loan with a lower interest rate.

Personal loans usually offer a lower interest rate than credit cards. In addition, they offer steady, predictable payments until you pay the debt off. This predictability makes it easier to budget for your payments. Plus, you know exactly when you’ll be out of debt.

Because personal loans are usually not secured by collateral, however, the lender is taking a greater risk and will most likely charge a higher interest rate compared to a secured loan. Just how high your rate will be can depend on a number of factors, including your credit score and debt-to-income ratio.

Recommended: Using a Personal Loan to Pay Off Credit Card Debt

The Takeaway

When comparing personal loans vs. credit cards, keep in mind that personal loans usually have lower interest rates (unless you have poor credit) than credit cards, making it a better choice if you need a few years to pay off the debt. Credit cards, on the other hand, can be a better option for day-to-day purchases that you can pay off relatively quickly.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is it better to have a personal loan than a credit card?

Typically, credit cards carry a higher interest rate than personal loans, but each financial product has its pros and cons. Consider your situation and the particular use you have in mind for the funds to make the right decision or your needs.

Is it better to apply for a personal loan or a credit card?

Whether a personal loan or a credit card is best for you depends on your needs and your financial situation. Typically, personal loans have lower interest rates and can be appropriate for large expenditures. Credit cards can be convenient for daily spending, but it’s best to pay your balance in full every month to avoid high interest charges.

What are the cons of personal loans?

The downsides of personal loans can include possible high fees and interest rates (which usually depend on your credit score). In addition, if not managed responsibly, a personal loan could damage your credit score.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOPL-Q425-019

Credit card debt is usually high-interest debt, meaning what you owe can snowball. You might charge some holiday gifts, then need new brakes, and then a friend asks if you can join on a low-cost getaway to Mexico. Next thing you know, you have a sizable balance due. And chipping away with minimum payments isn’t paying it down too well.

So how do you know if your credit card debt is actually too much? Take a closer look at the factors here, plus tips for what to do when your credit card debt veers into “too high” territory.

Managing Monthly Credit Card Payments

Many people believe that as long as they can afford the monthly payments, their level of credit card debt is fine. But faithfully making the minimum monthly payment on your credit card might not be a good indicator of whether you have too much credit card debt.

Generally speaking, it can be helpful to pay off your entire balance each month, but that is not a realistic option for many — and it can be easy to just pay the minimum amount required. This can be problematic: Thanks to compound interest, paying only the minimum amount can actually cause your debt to grow.

For example, say you have $5,000 worth of debt with a 20% interest rate and are paying off $100 a month. At that rate, it would take you 109 months (9-plus years) to pay off the original $5,000 and would cost you an extra $5,840 in interest alone. And, yes, as you may have noticed, the interest amounts to more than the principal in this scenario.

Curious how your credit card payments stack up? Use a credit card interest calculator to see exactly how much you can expect to pay in interest. That can help you see how the numbers stack up and then get a better handle of how your debt could grow in the future.

Credit Card Utilization

One helpful way to determine if you’re being smart with your credit cards is to look at your rate of credit card utilization. Credit card utilization is the amount of debt you have compared to the total amount of credit that is available to you.

It can come as a shock to people that using their full line of credit can negatively impact their credit score, but in general, it is commonly recommended to use only 30% of the credit available. Credit reporting agencies use your credit card utilization percentage as an important part of determining your credit score.

What does that look like in practice? If you have a credit card with a $10,000 limit, and you spend $1,000 on a new couch, $900 on new brakes, and $500 on a plane ticket, you’re using $2,400 — or 24% of your available credit. That’s relatively close to that 30% threshold, so you’ll want to consider treading carefully.

If, on the other hand, you made the exact same purchases but you only have access to a $5,000 line of credit, you would be using 48% of your available credit. A credit card utilization rate of 48% has the potential to negatively impact your credit score.

If you’re concerned about your credit score, you may want to keep your credit card usage to below 30% of the total credit line available to you.

Debt-to-Income Ratio

Another important consideration when looking at your credit card debt is your debt-to-income ratio. Your debt-to-income ratio is essentially a measure of how much of your pretax income goes to paying monthly debt, like car payments, student loans, and credit cards.

If your debt-to-income ratio is very high, meaning that a large portion of your monthly income goes to paying off debt, some lenders might be reluctant to lend to you.

This means that you could be charged a higher interest rate on new loans or a mortgage because the lender is worried that you won’t be able to make your monthly payments — if you’re able to get a loan at all.

In general, industry professionals suggest that a debt-to-income ratio at or below 36% is considered good, but of course, that will vary by your specific circumstances.

If your debt-to-income ratio is higher than you hope, that may be one sign that you’re carrying too much credit card debt.

Keeping Credit Card Debt in Check

If you’re worried about the amount of debt you’re carrying on your credit card, there are several ways to take control.

•   First, consider making more than the minimum payment, as noted above. Many people simply stick with minimum payments because they think that is what they should pay. But increasing your monthly payment could help you pay down credit card debt faster.

•   If you’re worried about your credit card utilization rate (and are not carrying a credit card debt balance), you may simply be due for an increase in your line of credit. For example, if you’re still using the same credit card with a $5,000 limit that you got right after college, but now you have a better job and more monthly expenses, you might want to ask your lender for an increase in your credit line in order to improve your credit card utilization rate. Your debt-to-income ratio can also be helped by either increasing your income or decreasing your debt.

•   Since one of the downsides of credit cards is their notoriously high interest rates, you might consider using a personal loan to pay off your credit cards and save you some money on your monthly payments.

•   The benefit of paying off your credit cards with a debt consolidation personal loan is that you may be able to trade a high interest rate for a lower interest rate and secure a more favorable repayment plan. A personal loan allows you to make a static payment every month for a set amount of time instead of paying the minimum amount due on your credit card, which can make you feel like you’ll never get out from under credit card debt.

Bear in mind that once you’ve paid off your credit card balances, it’s important to keep them low. Running those balances back up has the potential of making your credit profile less attractive to lenders due to the increased total debt.

And in the future, keep an eye on your credit limit when you’re making big purchases — it can pay off in the long run.

Recommended: Personal Loan Calculator

The Takeaway

How much credit card debt is too much will depend upon your specific financial situation. Such factors as your debt-to-income ratio and your credit utilization can help determine if your credit card balances are getting too high.

If you have incurred a considerable amount of high-interest debt, you might consider ways to pay that off, including getting a personal loan at a lower interest rate.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Is $20,000 in credit card debt too much?

Whether $20,000 in credit card debt is too much will depend on a person’s unique financial situation, but in general, it’s considered a significant balance that can have a detrimental impact on your finances. The longer the balance goes unpaid, the more the interest charges will compound.

How many people have $10,000 in credit card debt?

As of 2025, a survey by Empower revealed that one in four Americans who carry a credit card balance owe more than $10,000.

What is the 2/3/4 rule for credit cards?

The 2-3-4 rule for credit cards means you can get approved for no more than two new cards in 30 days, three new cards in 12 months, and four new cards in 24 months. This can help you manage how many applications you submit and gives lenders a guideline for approvals.

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