Give Me Some Credit: Line of Credit VS Credit Card (3 of 3)

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By this point you’re probably familiar with what a credit card is and how to use it. What you may not be as familiar with are other credit-based products, how to get them, and how they work. One of these products is referred to as a “line of credit”, and while it does have many similarities to a normal credit card account, there are also some big differences.

What is a line of credit?

A line of credit is a flexible loan that you can find through a bank or other financial institution. With a regular loan, you’re issued a certain amount of money, and charged interest on that amount until you repay the loan in full. A line of credit however, provides you with a credit limit (similar to a credit card) that you can borrow from, while only paying interest on the amount you use. Just like credit cards, lines of credit will maintain a revolving balance if not paid in full after each purchase.[1]

The similarities

Credit cards and lines of credit have many things in common. As mentioned above, both options allow you to make minimum payments and maintain a revolving balance, or pay off the entire balance at the end of each month. Regardless of which one you choose to get, it’s always a good idea to pay the balance in full and avoid high amounts of interest.

Another similarity is that both of these options have a preset limit. This means you can only spend up to a certain amount. In addition, your payments and activity will be reported to the credit bureaus whether you’re using a credit card or line of credit. This is why it’s important to always make timely payments no matter which one you’re using.[2]

The differences

While a line of credit and a credit card may seem like the same thing, there are many key differences that separate them. First, people choose to use them for very different reasons. A credit card is generally used for everyday purchases and spending, while a line of credit is more for big-ticket items and business expenses. Because of this, the limits vary widely for both options. A line of credit will usually be offered with a higher limit than a normal credit card account, which also means that a line of credit is harder to obtain. Your credit score and history of borrowing will affect whether you can get either of these, but you’ll likely need a very good credit score to access a line of credit.[2]

Credit cards are considered unsecured loans, as there’s no collateral involved. Lines of credit can also be unsecured, but there are secured lines of credit called “Home Equity Lines of Credit” which are backed by the value of your home. This means if you’re unable to pay, the financial institution is allowed to sell your home to make back their money.[1]

Another key difference between a line of credit and credit cards is that credit cards usually have 0% APR introductory offers for a specified amount of time, while a line of credit will probably not have any such offer. Credit cards also typically come with a rewards program based on the provider, and it’s rare to find a line of credit with a rewards program.[2]

Credit cards and lines of credit each come with a wide range of terms and options. Knowing the differences and similarities between these two products can save you a lot of time and money. We recommend doing a fair amount of research before committing to either of these products. Read the fine print, do your homework, and you’ll find the right product for your lifestyle and financial situation.

Read the other parts of our Give Me Some Credit series:


References

  1. Simpson, Stephen D. “The Basics of Lines of Credit” Accessed August 1, 2016. www.investopedia.com/articles/personal-finance/072913/basics-lines-credit.asp
  2. YKiernan, John “Line of Credit vs. Credit Card: Difference, Cost” Accessed August 1, 2016. https://https://www.investopedia.com/articles/personal-finance/072913/basics-lines-credit.asp

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