Differences Between a Line of Credit and a Credit Card (and When to Use Each)
If you’re purchasing a revolving loan, you have a few different options. While both lines of credit and credit cards offer flexible borrowing options, they have certain pros and cons that set them apart. It’s a classic “square vs. rectangle” situation: all credit cards are lines of credit, but not all lines of credit are credit cards. So, although a credit card is linked to (and allows you to access) a line of credit, it is possible to open a line of credit that does not have a credit card linked to it. Here’s what you need to know about some important differences between a line of credit and a credit card.
Access to funds
A line of credit allows you to borrow money up to a predetermined limit as needed. You can use this line of credit as you wish, often by transferring funds directly into your bank account. Credit cards, on the other hand, provide a revolving line of credit primarily for making purchases and, in some cases, for cash advances .
Interest rates
Interest rates generally favor lines of credit, which typically offer lower rates compared to credit cards . These rates are often variable, meaning they can fluctuate depending on market conditions. Credit cards, on the other hand, typically have higher interest rates, which can be fixed or variable depending on the card issuer and terms.
Repayment terms
A line of credit often requires minimum monthly payments and only accrues interest on the amount you actually borrow. This can make it a more economical option for larger, longer-term expenses. Credit cards also require minimum monthly payments, but any unpaid balances are charged interest, which can add up quickly if not managed carefully.
Withdrawal of funds
With a line of credit, you can usually transfer funds directly into your bank account, giving you more flexibility in how you use your money. Credit cards are primarily designed for direct purchases, although they offer cash advances at typically higher interest rates —a move I wouldn’t recommend .
Commission structures
Lines of credit may have annual fees and withdrawal fees, depending on the lender and the specific terms of the agreement. Credit cards often come with annual fees, balance transfer fees, and higher cash advance fees, as well as potential penalties for late payments or going over your credit limit.
Impact on credit rating
Lines of credit may have less of an impact on your credit utilization ratio, which is an important factor in credit scoring . Credit cards, however, can significantly impact this ratio, potentially having a greater impact on your credit score depending on how you use and manage the card. Here are some more ways to improve your credit score .
Best use
Lines of credit are usually ideal for financing large expenses , home renovations, or for use as emergency funds. Their lower interest rates and flexible withdrawal options make them well suited for these purposes. Plus, a personal line of credit gives you more flexibility than a one-time personal loan . Credit cards are better for everyday purchases, building a credit history through regular use and on-time payments, and earning rewards such as cash back or travel points .
What does this mean for you
When choosing between a line of credit and a credit card, consider your financial needs and habits. If you’re planning a major expense or want financial security, a line of credit may be your best choice. Lower interest rates and flexible withdrawal options can save you money in the long run. But for most people’s everyday spending, credit, and rewards needs, a credit card is a better option. This is also a more common option for regular purchases.
Your credit score may benefit more from responsible credit card use, but a line of credit may be less risky if you’re concerned about overspending. Consider your ability to manage credit responsibly . We all know how credit cards can lead to high-interest debt if not paid off monthly: if you’re feeling cautious, lines of credit can offer more breathing room with potentially lower rates. And remember, you are not limited to choosing just one. Many people value having both a line of credit and a credit card, using the strengths of each to create a comprehensive approach to personal finance.