While a personal line of credit is more commonly categorized as a loan, in reality, it functions more like a credit card. That’s because a line of credit is a form of revolving debt, in which the money you borrow is paid back... only to be borrowed again.
There are other similarities between a line of credit and credit card, however, there are also some key differences. Understanding how these two financial products compare and contrast will help in determining which option is the best for a consumer’s personal needs.
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How They Are Obtained
Applying for a line of credit is a similar process to that of a credit card. An applicant’s income and credit history will factor into their eligibility, as far as ultimately becoming approved and at what interest rate and credit limit (i.e., the total amount you can borrow from). While a line of credit will typically offer a higher credit limit and lower interest rate when compared to a credit card, the credit score requirement is higher as well.
While most lines of credit are unsecured (i.e., don’t require collateral), similar to the majority of major credit cards, there is also a secured line of credit option for borrowers with poor credit, which are comparable to secured credit cards. Using a secured financial product is a good way to demonstrate responsible spending and bill paying habits, since this activity is reported monthly to all three credit bureaus, too. Positive reports can boost a consumer’s credit score and make them eligible for more higher-end accounts.
How They Are Used
Similar to how a credit card has a limit on how much you can spend, a line of credit has a limit on how much you can draw. A borrower can redraw from their line of credit account as much as they’d like, as long as there are funds available. Another similarity is both products have monthly billing cycles to determine your account balance, and each requires only a minimum payment to keep the account in good standing.
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Still, there are many differences between a line of credit and credit card. For starters, a line of credit does not include a grace period in between billing cycles, which allows credit card users to pay off their account balance and avoid interest charges. With a line of credit, interest is charged every time you draw from the account no matter how quickly you pay it back. However, while credit cards charge compound interest (i.e., interest on interest) for users that carry a balance, a line of credit typically uses simple interest charges, which do not compound.
Another difference is how long you can use each product. A credit card essentially has no expiration date; as long as you pay the annual fee (if there is one) you can continue using the same card. A line of credit, on the other hand, has a predetermined draw period (the timespan a borrower can draw freely from their account) and repayment period (when borrowers can no longer draw, and must pay their remaining balance in full).
There are several other little nuances between a line of credit and card card. For one, a line of credit does not typically offer any special rewards, like the cash back or bonus points/miles you can earn on a credit card. A line of credit also doesn’t offer introductory APR periods, which credit card issuers use for interest-free promotions.
Also, while annual fees are higher on average for a line of credit compared to a credit card, it is the latter that has the highest max annual fee, when applied to premium cards. Also, while credit cards typically have a cash advance fee, a line of credit charges no such fee, as drawing from an account is essentially the same thing.
Now that we’ve covered the major similarities and differences between the two, it’s up to the consumer to decide which option is best for their needs. Some people get a line of credit for unexpected emergencies, while preferring their credit card for everyday expenses. A line of credit can also be good for covering gaps in income, or for larger purchases that a credit card’s limit cannot afford. Whatever the reason, users can try Fiona to compare line of credit options from a variety of top online providers.
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