Line of Credit vs Credit Card: What’s the Difference?

Having access to credit can be valuable for managing personal finances or running a business. Two popular forms of credit that individuals and businesses often consider are lines of credit and credit cards. Both options provide flexibility and convenience, but they’re not without their differences. Whether you’re an individual seeking financial flexibility or a business owner looking for financing solutions, this line of credit vs credit card comparison will help you decide which is right for you and your financial needs. 

Line of Credit vs Credit Card 

A line of credit and a credit card are two types of credit options offering varying benefits and features. A line of credit gives borrowers a predetermined amount of money that can be borrowed as needed, similar to a loan. It typically offers lower interest rates, making it an attractive option for larger expenses or ongoing financing needs. 

On the other hand, a credit card provides a revolving credit line that allows users to make purchases up to a certain limit. It offers convenience, flexibility, and rewards programs but may have higher interest rates. The choice between a line of credit and a credit card depends on the individual’s or business’s specific financial requirements and preferences. Let’s get started with a detailed comparison of both these types of credits. 

Line of Credit vs Credit Card Comparison 

Interest Rates, Terms and Limits 

Regarding interest rates, lines of credit typically offer lower rates than credit cards. Lines of credit calculate interest based on the amount borrowed and charge interest only on the outstanding balance. In contrast, credit cards have higher rates and calculate interest on the outstanding balance. 

When it comes to terms, lines of credit provide more flexibility with extended repayment options, whereas credit cards generally require full payment by the due date or minimum monthly payments. 

Regarding limits, lines of credit usually have higher credit limits based on creditworthiness, while credit card limits are often lower and determined by the card issuer. You must carefully evaluate these factors and choose the option that aligns with your financial needs and preferences.

Benefits and Rewards 

Credit cards often come with various benefits and rewards programs. These benefits may include cashback on purchases, travel rewards such as airline miles or hotel points, discounts on specific products or services, and access to exclusive perks like concierge services or lounge access at airports. Credit card users can take advantage of these rewards by using them for everyday expenses and responsibly managing their payments. 

In contrast, lines of credit typically do not offer specific rewards or benefits beyond the flexibility of borrowing and repaying funds as needed. The primary advantage of a line of credit lies in its ability to provide a reliable source of financing for larger expenses. You can also use it for ongoing financial needs without the focus on rewards or benefits that credit cards provide. Thus, individuals seeking additional perks and rewards may find credit cards more appealing, while those prioritizing financial flexibility and borrowing capacity may lean towards lines of credit.

Approval Rates  

Approval rates for lines of credit and credit cards can vary depending on several factors. Lines of credit generally have strict approval criteria compared to credit cards. Lenders evaluate factors such as credit score, income stability, and debt-to-income ratio when determining approval for a line of credit. They may also consider the purpose of the credit line and the borrower’s ability to repay the borrowed amount.

On the other hand, credit cards tend to have higher approval rates, especially for entry-level or basic credit cards. Credit card issuers may have less stringent requirements and may approve individuals with lower credit scores or limited credit history. However, premium or rewards credit cards often have more stringent approval criteria and may require a higher credit score and income level.

What is a Line of Credit? 

A line of credit is a flexible form of borrowing that allows individuals or businesses to access a predetermined amount of funds from a lender as needed. It functions similarly to a loan but with more flexibility. With a line of credit, you can withdraw funds up to the approved limit and only pay interest on the amount borrowed. 

As the borrowed funds are repaid, the line of credit replenishes, making it a revolving source of financing. This type of credit is often used for ongoing expenses, emergencies, or to bridge gaps in cash flow. It offers flexibility in borrowing and repayment, making it a valuable financial tool for managing fluctuating financial needs.

Pros and Cons of a Line of Credit 

How a Line of Credit Works?  

A line of credit is a flexible form of borrowing that allows individuals or businesses to access funds up to a predetermined credit limit. When approved for a line of credit, the borrower can withdraw funds up to the approved limit as needed, similar to a credit card. However, unlike a traditional loan, the borrower only pays interest on the amount they have withdrawn, not the entire credit limit.

Once the funds are withdrawn, the borrower is typically required to make regular minimum payments, which include both principal and interest. As the borrowed funds are repaid, the available credit replenishes, creating a revolving line of credit. This means borrowers can continuously access funds if they stay within the credit limit and make the required payments. The interest rate on a line of credit may be variable or fixed, depending on the terms of the agreement.

When to Use a Line of Credit? 

A line of credit is typically used when individuals or businesses require flexible and ongoing access to funds. It can be beneficial for emergencies or unexpected expenses, managing cash flow fluctuations, financing ongoing projects, addressing business seasonality, seizing investment opportunities, or consolidating debts. Whether covering unforeseen costs, supporting business operations, taking advantage of favorable market conditions, or managing existing debts, a line of credit offers the convenience of accessing funds as needed, making it a versatile financial tool for various financial needs and goals.

What is a Credit Card? 

A credit card is a payment card issued by a financial institution that allows cardholders to purchase on credit. It works as a revolving line of credit, enabling users to borrow money up to a certain credit limit set by the issuer. Cardholders can make purchases using the card, and the card issuer covers the cost of the transaction. 

Users must repay the borrowed amount to the issuer by the due date or through minimum monthly payments, with interest charged on any remaining balance. Credit cards offer convenience, flexibility, and the potential to earn rewards or benefits based on card usage, making them widely used for everyday transactions, online shopping, and travel expenses.

Pros and Cons of a Credit Card 

How Do Credit Cards Work?  

Credit cards are a revolving line of credit issued by financial institutions to individuals. When approved for a credit card, they are assigned a credit limit, representing the maximum amount they can borrow. The cardholder can purchase using the credit card up to the approved limit. Instead of immediately paying for the purchases, the cardholder incurs a debt to the credit card issuer.

Credit card statements are generated monthly, detailing the transactions made during that period. The cardholder must then make a minimum payment by the due date mentioned on the statement, typically a percentage of the outstanding balance. If the full balance is not paid, interest is charged on the remaining amount, known as the revolving balance. This interest is calculated based on the annual percentage rate (APR) associated with the credit card.

When to Use a Credit Card

You can use credit cards for convenience, security, and potential benefits in various situations. They are particularly useful when making online purchases, as they offer secure payment options. Credit cards can also be beneficial when traveling, as they provide a widely accepted payment method, access to travel rewards, and additional protections such as travel insurance. 

Furthermore, you can use credit to build a credit history, establishing a positive credit profile for future financial endeavors. However, it is important to use credit cards judiciously, avoiding excessive debt and paying off the balance in full each month to avoid high-interest charges. 

Keep in mind that as a general rule of thumb, try to use a credit card the way you would a debit card. In other words, only use it for purchases that you have the money for. This way, you can pay your balance off in full each month. And in return, never pay anything in interest while still reaping the benefits of using a credit card. 

Bottom Line 

Both lines of credit and credit cards offer unique features and benefits that cater to different financial needs. A line of credit provides flexibility and ongoing access to funds, making it suitable for managing fluctuating expenses, emergencies, and financing projects. On the other hand, credit cards offer convenience, rewards, and broader acceptance, making them ideal for everyday purchases and online transactions. 

Understanding the differences between these two financial tools and considering individual circumstances is crucial in making an informed decision. Whether it’s a line of credit or a credit card, responsible use, proper repayment, and staying within limits are essential to maintain financial health and maximize their benefits. 

Frequently Asked Questions (FAQs)