Line of Credit vs. Credit Card: Difference, Cost & More
Lines of credit and credit cards are two very similar types of financial products that help consumers, small business owners and even large corporations access borrowed funds on an as-needed basis. In order to help you better understand the differences that do exist between a line of credit and a credit card as well as the roles each can serve in your financial life and how to choose between them, we’ve compiled a complete comparison below.
Line of Credit vs. Credit Card: Key Differences
|Feature||Line of Credit||Credit Card|
|Intended Use||Special big-ticket consumer & business expenses.||Everyday consumer & business spending.|
|Proof of Income Required?||Yes, usually in the form of your latest W-2 or tax return.||No, but honest documentation is required.|
|Secured By Collateral?||Sometimes, but not required.||Secured Cards are, while “normal,” unsecured credit cards are not.|
|Credit Building Impact||Reported monthly to credit bureaus||Reported monthly to credit bureaus|
|Credit Line||Personal: $500 - $25K
Business: $1,000 - $100K
|Personal: $300 - $15K
Business: $1,000 - $50K
|Average APR||Purchase: 13.87%
Cash Advance: Same as Purchase
Cash Advance: 22.07%
|0% Introductory APR||Rarely||0% for 6-24 months is common for people with excellent credit.|
|Annual Fees||Range: $0 - $50
|Range: $0 - $495
$12 (all cards)
$63 (cards with annual fees)
|Rewards||Rarely||Yes, 1% cash back on average|
|Cash Advance Fee||None||$13.05|
|Grace Period||None||20 – 30 days after bill is made available|
Choosing Between a Credit Card & a Line of Credit
The choice between a credit card and a line of credit depends primarily on whether or not you need cash, how much you need and, possibly, what assets you have to serve as collateral.
Most people will be better off simply getting a credit card, as it’s more straightforward than opening a traditional line of credit and should be able to serve most spending and funding needs splendidly. You’ll also be able to make purchases anywhere VISA or MasterCard is accepted. Just make sure not to get a card with annual fees unless there are certain benefits (like extra rewards) that make the cost worthwhile.
It’s best to use a line of credit only if you need a significantly higher credit line than a credit card will provide (particularly if you have property to put up as collateral), or if you need to borrow actual cash for big-ticket purchases.
With that being said, verify that you’re not missing any unusually attractive credit card offers. It’s hard for a credit line to compete with 0% for 15-24 months and no fees, at least for folks looking at a short-term repayment timeline.
Ask The Experts: Extra Credit
For more insight into the distinct roles that credit cards and credit lines play in the payments landscape and overall economy, we turned to a panel of leading business and personal finance experts. You can check out their bios and thoughts below.
- The term “credit line” seems to be far less popular and much less understood than “credit card” – why is that?
- When do you recommend consumers consider credit lines?
- What is the biggest potential pitfall you recommend consumers watch out for when using / considering credit lines?
- How do business lines of credit differ in terms of the above issues?
Credit cards are so easy to apply for and get that they have been the tool of choice for many consumers. Unless someone has a real banking relationship, they may not have been exposed to the option of a credit line. Credit lines are used much like credit cards, you have an amount you can use at your discretion up to a limit and then you must repay. You can repay and reuse many times, just like a credit card.
Credit lines are more often used by people who have good credit. The costs will be lower for those with good credit. The difference in costs for consumers with some credit problems often means consumers with problems or a limited credit record prefer credit cards.
When do you recommend consumers consider credit lines?
Credit lines may be cheaper than credit cards. Someone who is established in a community, owns property, etc. ,may consider a credit line. Generally, people with good credit records are more likely to use credit lines.
What is the biggest potential pitfall you recommend consumers watch out for when using / considering credit lines?
Watch out for what happens if you fail to repay on time. It would not be unusual to be in a situation where the entire amount could be due at one time because you are not repaying the amount borrowed. Also, interest rates could change under certain conditions, so be aware of them.
I am most familiar with "credit lines" for businesses. I do not know why consumers would want a credit line if they have a credit card. Business lines of credit are to help them with cash flow issues knowing that they would most likely have a stream of income from the business. If consumers tended to be spenders, they perhaps could spend the money on disposables and have nothing to show for it in the end but extended debt.
Those that understand interest, earn it. Those that don’t, pay it.
Avoid debt like the plague… unless it’s for a modest home, a good/affordable education that leads to a good job, and modest transportation to get you to work/school.
In terms of credit cards – I would try to make it through life without ever paying a dime of interest, late fees, or anything to the credit card companies. I love credit cards, and I personally have about 15 of them! But I always pay off the balance in full each month and avoid interest, but maximize my own rewards/perks offered by the various companies. I have so many, because I travel a lot for work, so I have one from each airline I like to fly and one for each hotel chain I like to stay in so that I’m maximizing rewards/perks.
When do you recommend consumers consider credit lines?
One line of credit I am a fan of is the line of credit you can get for the home equity you have (HELOC). In the financial planning profession, Dr. Michael Finke of Texas Tech has demonstrated that this is a great “emergency fund” to have in case of a real, legitimate emergency. Using the HELOC as your emergency fund (for true emergencies, not emergency vacations, lifestyle upgrades, etc.) is great because it frees up your liquid assets to be invested in assets that appreciate rather than sitting in a bank account gathering no interest.
How do business lines of credit differ in terms of the above issues?
For business owners, they have put every ounce of money and time they have into the company, so that ends up being their only asset. Not great for a diversified portfolio, but entrepreneurs don’t care! They are all in on this one idea/business.
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