A line of credit may be good for larger purchases that you want to pay off at a lower interest rate, while a credit card is beneficial for everyday purchases. Understanding the differences can help you figure out which type of account is best for your current and future needs.
What’s the Difference Between Lines of Credit and Credit Cards?
A credit card and a line of credit both offer revolving credit, but they have some key differences. Banks that do offer lines of credit typically require you to have an existing checking, savings, or investment account to apply for a line of credit. Line of credit products may be limited to states where banks have physical branches, which can make these harder to access.
Cost
Personal lines of credit tend to have lower interest rates compared to credit cards and borrowers may have an opportunity for even lower rates by having an existing account or using collateral. With credit cards, saving on interest takes a bit more planning. You can pay your full balance each month or take advantage of a card with a promotional 0% interest rate. Annual fees are fairly common with credit cards, especially cards that offer better rewards and perks. Personal lines of credit, on the other hand, generally don’t often charge any ongoing or transaction fees, other than interest.
Ideal Use
Because a personal line of credit gives you access to a large amount of available credit, it’s better used for large purchases that you might not have a high enough credit limit to accommodate. For instance, you may use a line of credit for home improvement, to consolidate debt, or to pay for wedding expenses.
Collateral Requirements
In some cases, a bank will require collateral for some types of lines of credit, particularly if you’re accessing a large line of credit. Collateral can be non-retirement stocks and bonds, money you have in a CD or savings account, or equity in a home. Even when it’s not required, offering collateral can make it easier to qualify and allow you to access much higher credit lines or lower interest rates. Credit cards have far more options for credit limits that don’t require collateral. In fact, only a specific type of credit card—secured credit cards—requires collateral, generally for cardholders who are establishing or rebuilding credit.
Which Is Right for You?
Whether a credit card or a line of credit is right for you will depend on a number of factors about your personal circumstances and how you need to use the credit. A line of credit might be right for you if:
You need flexible access to cash for large purchasesYou want to take advantage of the buying power of your assets without liquidating themYou prefer lower interest rate financing
A credit card might be right for you if:
You have a low credit score and few non-retirement investments or savingsYou don’t have large expenses coming upYou want to take advantage of rewards or promotional interest rate
A Best-of-Both Worlds Option
Most people have a range of financial needs that include both short-term everyday spending and larger expenses. Having both a credit card and a line of credit allows you to access the type of credit you need at any time with the flexibility to pay the balance over time. You can use as much or as little of your credit as you need and it becomes available for you to use again as you pay your balance down.
How To Get a Line of Credit or Credit Card
You can typically apply for a credit card or a line of credit online. You’ll provide your personal information like your name, address, Social Security number, and income. In some cases, you’ll find out whether you’ve been approved instantly, and how to access your credit card or line of credit right away.Since approval and interest rate is based on your credit rating, checking your credit score before applying can give you a sense of whether you’ll be approved and the type of interest rate you may receive.
The Bottom Line
Credit cards are easily accessible, which makes them great for everyday spending, but they tend to carry higher interest rates and lower credit limits. A line of credit provides more spending power at a lower interest rate but isn’t as widely available. Since both types of accounts can be used as needed, it could be beneficial to have both options.
