6 Min Read | January 12, 2023
Line of Credit vs Credit Card: What’s the Difference?
Both a credit card and a personal line of credit can help meet your borrowing needs, but it’s important to understand the nuances that differentiate the two.
At-A-Glance
A credit card and a line of credit are both forms of revolving credit, but there are important differences between the two.
A personal line of credit offers more ways to pay than a credit card.
Credit cards might have higher interest rates, but they also usually have the benefit of an interest-free grace period.
You’ve likely heard of businesses establishing a line of credit. You also may be aware of a home equity line of credit, or HELOC. But did you know that some banks and credit unions also offer personal lines of credit to individuals?
Like a credit card, a personal line of credit provides the ability to borrow money. But what’s the difference between the two options? Does opening a line of credit make sense, or is a credit card more your speed? It all depends on your financial needs, your spending preferences, and, of course, your credit score. Let’s explain.
Is a Credit Card a Line of Credit?
Yes, a traditional credit card is, in effect, a line of credit. But a personal line of credit most certainly is not the same thing as a credit card. Though they’re both revolving credit accounts that you can tap into to help cover expenses as needed, they work in different ways. For example, you can open a line of credit without any payment card attached to it.
If this sounds a bit confusing, think of it this way: Though a “line of credit” may refer to a specific lending product, it’s also used as an umbrella term for several different types of credit lending options that allow a customer to repeatedly draw funds, as needed, and repay with interest or fees. Credit cards and personal lines of credit are two specific types of lines of credit available to consumers. Other types include HELOCs, a type of secured line of credit for homeowners; and overdraft lines of credit, which trigger the bank to cover expenses if, for example, you make a purchase that exceeds your current checking account balance.
What’s the Difference Between Personal Lines of Credit and Credit Cards?
A personal line of a credit and a credit card do have some traits in common: At a high level, they both essentially lend you money and require you to pay it back with interest. Their differences, though, lie in a few key nuances, such as:
- Interest rate: A personal line of credit typically offers a lower interest rate than a credit card. How big that gap is depends on several factors, most notably your credit score. The average APR on credit cards has hovered around 16% since 2018.1 For a line of credit, you may find single-digit interest rates, as well as some that are higher than the average APR on the credit cards, depending on the lender and your financial situation. As a general rule, the stronger your credit score, the lower the rate you’ll qualify for.
- Interest-free grace period: Interest begins accruing on a personal line of credit as soon as you withdraw funds against it. Most credit card companies offer an interest-free grace period between the end of the billing cycle and your payment’s due date. Any portion of your balance that is not paid off by the due date will begin to accrue interest.
- Rewards and benefits: Personal lines of credit do not offer rewards or benefits; credit cards usually do. Credit card incentives may include cash-back rewards or points-earning programs for travel, entertainment, and other purchases. Cards might also offer additional benefits, like statement credits for specific purchases or travel perks like complimentary airport lounge access.
- Credit limit: Depending on your credit score and financial situation, you might find a line of credit with a credit limit of $25,000 or more. Credit cards tend to have lower credit limits, though some cards have no preset spending limits.
- How to access funds: A personal line of credit offers more flexibility with regard to how you can use funds. For example, you can usually write a check, use a bank card, or make cash withdrawals. With a credit card, you’ll need to use the card in person or enter card details online. You may be able to get a cash advance, but this option usually incurs additional fees and higher APRs.
- Application requirements: Credit checks are performed with both applications, but the process for a line of credit is often more in-depth. Applying for a line of credit might require more documentation to verify your income than a credit card application would demand, with you being asked to provide more detailed information about your financial situation, for example.
Differences Between Personal Lines of Credit and Credit Cards
| Personal Line of Credit (LOC) | Credit Card | |
|---|---|---|
| Interest Rate | Variable; often lower than credit card. | Variable; often higher than personal LOC. |
| Interest-Free Grace Period? | No. | Usually yes. |
| Rewards and Benefits Offered? | No. | Usually yes; depends on card. |
| Credit Limit | Often higher; depends on borrower. | Often lower; depends on borrower. |
| How to Access Funds | Can usually write checks, use a bank card, or make cash withdrawals at no extra fee. | Must use credit card in person or provide card info for online purchases. Cash advances may be available with additional fees and APRs. |
| Application Requirements | Credit check performed; more in-depth income info may be required. | Credit check performed; less in-depth financial info may be required. |
The Pros and Cons of a Line of Credit
Though a personal line of credit is generally a less common lending choice than a credit card, they offer benefits like more flexibility with regard to how you can make payments. For example, there’s no separate cash advance fee or additional APR for withdrawing cash. Still, there are downsides to consider.
Personal Line of Credit Pros and Cons
| Pros | Cons |
|---|---|
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The Pros and Cons of a Credit Card
Credit cards offer a convenient alternative to using cash on an everyday basis. From bagel shops and clothing boutiques to supermarkets and golf courses, credit cards have become a ubiquitous payment method. According to a 2021 report from Experian, Americans maintained, on average, three to four credit cards, as of late 2020.2
Despite their popularity, there are advantages and disadvantages to be aware of when using a credit card.
Credit Card Pros and Cons
| Pros | Cons |
|---|---|
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How Do You Choose the Right Form of Credit?
With so many credit options to choose from, how do you know which one matches your needs and your financial future?
When it comes to everyday spending, credit cards are usually a better option than a line of credit. Given the fact that lines of credit begin to accrue interest immediately after a purchase is made, it usually doesn’t make sense to draw on a line of credit when your to-do list includes filling up the car with gas, buying clothes and school supplies for the kids, and doing the grocery shopping (after you treat yourself to lunch, of course). With the various incentives offered – especially cash back or points as rewards – credit cards are typically a good option for everyday purchases.
On the other hand, when you need to make a larger purchase, or perhaps require money to cover an emergency, a line of credit may prove useful. Surprise home repairs? Ongoing medical treatments that come out of your pocket? Unsure how much these bills will amount to at the end? A line of credit may work out as the better play here, since they often carry more favorable interest rates and higher credit limits. They also allow you to make withdrawals as the bills come in and the total expenditure comes into clearer focus, plus you pay interest only on what you use.
The Takeaway
Credit cards and personal lines of credit share some common features, but the nuanced differences between the two are important to consider. Financial circumstances often dictate which form of revolving credit is right for you. But personal preference for the overall package – rewards points vs a better interest rate, for example – can also factor into your decision. One thing that stands true for both credit cards and personal lines of credit: The better your credit score, the more favorable your terms.
1 “Commercial Bank Interest Rate on Credit Card Plans,” Federal Reserve
2 “What Is the Average Number of Credit Cards per US Consumer?,” Experian
Michael Grace is a personal finance and technology freelance writer based in New York.
All Credit Intel content is written by freelance authors and commissioned and paid for by American Express.
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