In a Nutshell
Both credit cards and personal lines of credit offer ways to borrow money for everyday purchases or larger expenses. While there are some similarities, there are also major differences. Understanding them can help you figure out which may work for you.
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If you need some flexibility with your borrowing, a personal line of credit or a credit card may help.
Both options operate as a revolving line of credit that you can use, pay off and use again. But they differ in how you can use them and in the features they offer.
- Personal lines of credit vs. credit cards
- When should you consider using a credit card?
- When should you consider using a line of credit?
Personal lines of credit vs. credit cards
One of the best ways to describe the similarities and differences between a personal line of credit and a credit card is that credit cards are all technically lines of credit, but not all lines of credit are credit cards.
A credit card is generally a good option for everyday spending, especially if you plan to pay your bill in full every month.
In contrast, a line of credit may make more sense for long-term financial needs that may not have a fixed monthly cost, like unexpected expenses or paying for a long-term hobby.
Here’s a quick breakdown of how the two options are similar and different.
How personal lines of credit and credit cards are similar
- Revolving credit line — Both a credit card and a line of credit operate on a revolving credit line. You’ll receive a credit limit when you’re approved, and you can use your card or line of credit as long as you have available credit on the account. Once you reach the limit, you typically can’t use the account until you’ve paid down some of the balance. But as long as you pay off some of your purchases, you may be able to continue using your card or line of credit over and over again.
- Collateral requirement — Many credit cards and personal lines of credit are unsecured, though some do require collateral in the form of a security deposit or the balance in your savings account or a certificate of deposit if you have a lower credit score.
- Payments — Unlike installment loans, there’s no fixed monthly payment based on a loan limit with a credit card or a line of credit. Instead, you’ll get a monthly bill that shows your purchases (advances for a line of credit), payments, interest charges and fees based on what you may have added to the account balance, and you’ll be given a minimum amount due that may be based on the current balance. You’ll be considered on time if you make the minimum payment before the due date, but you’ll save on interest if you pay more.
Differences between personal lines of credit and credit cards
- Usage — With a credit card, you can make online and point-of-sale purchases using your line of credit. But if you want cash, you may pay a fee for a cash advance, and the interest rate on that advance may be higher than the card’s regular purchase APR. If you get a personal line of credit, though, you can access your line of credit via a transfer to your bank account, a paper check or a debit card that’s tied to the credit line, giving you more flexibility.
- Credit limits — Although it’s possible to get a high credit limit with a credit card, you can generally get a higher one with a personal line of credit, making it a better option for large expenses and projects.
- Repayment term — With a personal line of credit, you’ll have a draw period and a repayment period. These terms can vary by lender, but it means you may draw from your line of credit for a predetermined period, after which you have to pay down your remaining balance without the ability to take additional withdrawals. On the flip side, credit cards offer continuous repayment, which means you can use your card as long as you stay below your credit limit and the card issuer keeps it open.
- Grace period — Credit cards typically feature a grace period — which is the period between your monthly statement date and your due date — during which you can pay off your balance with no interest. The only exceptions to this rule are if you take out a cash advance, which doesn’t come with a grace period, or if you carry a balance from month to month. With a personal line of credit, there’s no grace period, even if you pay your bill on time and in full every month.
- Rewards and benefits — One of the biggest benefits of having a credit card is that you can often earn cash back, points or miles on your everyday spending. Some cards also offer sign-up bonuses, travel benefits and other perks to incentivize regular use. In contrast, personal lines of credit typically don’t come with these features.
- Interest rates — In general, personal lines of credit offer lower interest rates than credit cards, making them more attractive for large expenses that you want to pay off over time.
- Availability — If you’re looking for a new credit card, you’ll find offerings from banks, credit unions and online lenders for people across the credit spectrum. But when it comes to personal lines of credit, some larger banks don’t offer them, and you may need strong credit to get approved.
When should you consider using a credit card?
You can use credit cards for everyday expenses or for larger purchases that you plan to pay off over time. But because many cards have interest rates on the higher side, they might be better for smaller purchases. Your best bet to avoid interest charges is to pay your bill on time and in full each payment cycle.
Credit cards can also be a better choice if you want to earn rewards on your spending or take advantage of other benefits.
Finally, credit cards are best for people who don’t need cash. While you can take a cash advance on your credit card, you may end up paying a fee and potentially a higher interest rate.
When should you consider using a line of credit?
Because a personal line of credit can give you access to a higher credit limit, this option may be better for larger expenses, such as home renovations, high-interest debt consolidation, medical expenses, a wedding and more.
Because interest rates may be lower than what you’d get with a credit card, you could save money as you pay off your balance.
A line of credit is also a better option if you need to deal in cash because you won’t have to pay a hefty cash advance fee and a higher interest rate every time you take a draw from the account.
Finally, a line of credit may be preferable if you only need financing for a specific amount of time and don’t mind losing access to the credit line once the draw period is over.
As you compare a personal line of credit vs. a credit card, think carefully about your financing needs and the features you need to achieve your goals. It can help to compare options from various lenders and card issuers to get a better idea of what might work best for you.
Once you decide which type of credit you want, continue to shop around and compare fees, interest rates and other features to ensure you’re getting the best deal.
About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Credit Karma, you can find his wo… Read more.