When Does it Make Sense to Use a Line of Credit vs. a Credit Card?

Credit cards and line of credit accounts are similar revolving credit-based products. They both offer consumers access to necessary funds, whether for daily spending or a big, one-off purchase.

While line of credit accounts and credit cards have a lot of overlap, they also differ in many ways. Depending on how you plan to use and pay back the borrowed funds, one product may make more sense over the other.

What is a Line of Credit?

A line of credit is an open-ended credit product offered by banks, credit unions, and other lenders. It allows users to borrow funds up to a predetermined limit, which can be utilized for any number of purposes. Money from a line of credit account can be accessed directly through paper checks or as a bank transfer. 

After pulling from a line of credit, borrowers will receive a monthly statement with a minimum payment amount. This balance will accrue interest on a monthly basis until paid back in full.

Depending on the provider, lines of credit accounts can either be unsecured, or secured by assets like the equity in your home.

Line of Credit vs Credit Card: How They’re Similar

In many ways, line of credit accounts and credit cards are pretty similar. Here are a few characteristics they have in common.

Credit-based: Getting approved for either a credit card or line of credit will be based on creditworthiness. This means that a lender will look at your credit score, payment history, existing debt, and even income to gauge approval and determine your limit. Once either account is opened, they will be reported to the credit bureaus on a monthly basis.

Revolving limit: Line of credit accounts and nearly all credit cards are forms of revolving debt. Borrowers can spend up to the credit limit at any time and any payment made reduces the balance on the account, thereby freeing up the available credit you can spend.

Charge interest on balance: With the exception of special offers, both line of credit accounts and credit cards will charge interest on any unpaid balance. This interest will compound from one month to the next if you carry a balance over, and interest rates may be either fixed or variable depending on the lender and the product. 

Require a minimum monthly payment: Regardless of how much you spend on your account, you will be required to make a minimum payment each month. This will generally be calculated as a percentage of your total balance. Failure to make at least the minimum payment will result in penalty fees, on top of accumulated interest charges. 

You only pay on what you borrow: If you don’t use your credit card or your line of credit, you won’t owe a monthly payment or be charged interest. You can simply let that available credit sit until you need to pull from it. 

May charge annual fees: Depending on the credit card you choose, you may incur an annual fee just for having the account open, even if you don’t use the card. In some cases, this fee may be worthwhile (if you earn more in rewards than the fee cost, for example), but for many card users it can be an unnecessary expense. Lines of credit accounts often charge annual maintenance fees, and may also charge a transaction fee each time you request funds from the account. 

Line of Credit vs Credit Card: How They Differ

While credit cards and line of credit accounts are similar, there are some very key differences to note.

Interest rates differ: In general, credit cards charge higher interest rates than line of credit accounts, especially if the line of credit is secured by an asset. Most credit cards, however, are unsecured accounts. 

APR promotions: With that said, many credit card issuers offer a 0% APR period to new cardholders, or to current cardholders who perform a balance transfer. This allows you to pay off a big purchase or refinance existing debt without incurring additional interest charges (for a specific period of time). After that introductory period, rates will return to normal. Lines of credit don’t generally offer introductory interest rates.

Credit cards may offer rewards: Some credit cards offer rewards on the purchases that users make. These might come in the form of cash back, points, or miles, and essentially act as spending perks to promote card loyalty.

How long you have access to funds: With a credit card, you can continue spending up to your revolving credit limit until you max out the card, close the account, or have the account closed on you. With a line of credit, however, you’ll generally be given a draw period, or a set timeframe during which you can pull from the line of credit. Once the draw period ends, a repayment period follows, where you can no longer draw and must repay your remaining balance in full. 

Choosing between a credit card and a line of credit really depends on how you plan to use the product. If you’re looking for access to cash or plan to make infrequent purchases, a line of credit may be worth a look. This is especially true if you plan to hold the balance for some time, as interest rates can often be lower.

Credit cards are a better choice for frequent purchases, such as everyday spending. While interest rates are higher on average, many issuers offer introductory 0% APR periods, and you also have the opportunity to earn rewards on your spending. 

Since both products are credit-based and charge interest on unpaid balances, it’s important to pay off your credit card or line of credit in a timely, regular fashion. 

With Fiona, users can compare line of credit offers from a variety of top online providers — all in one place.