September 14, 2017 in Credit Cards

Line of credit and credit card: What’s the difference?

Have you heard of a line of credit but are still unsure exactly what it means? Relax, chances are very good that you already have a line of credit right in your wallet: a credit card. So what’s the difference between a line of credit and a credit card?

Both lines of credit and a credit cards are types of revolving credit, which means a lender approves the borrower for a specific amount of money, and the borrower can repeatedly borrow from this amount as long as they have credit available. Once approved, you don’t have to use the full amount or even any of it, and you can wait until you need it.

Line of credit versus credit cards

Credit cards and lines of credit are actually closely related. In fact, a credit card’s only use is to let you access and utilize a line of credit issued to you by your bank or financial institution.

Where they diverge is that a line of credit can also exist independently of a credit card, such as a home equity line of credit (HELOC). There are benefits and drawbacks to each.

With both a line of credit and a credit card, you can continually access your credit, unlike an installment loan, such as a mortgage or car loan, in which the initial sum is paid out all at once.

The main differences

There are a few key differences that distinguish a credit card from a line of credit. A credit card may be easier to obtain, because it doesn’t require documentation of income the way a line of credit does. That makes it more convenient for everyday use.

Another big difference is the grace period on interest. With a credit card, you get between 20 and 25 days before you start accruing interest on a balance, but a line of credit starts accruing interest immediately.

Businesses often favor lines of credit for their flexibility. With a line of credit you won’t pay a cash advance fee the way you would for a credit card. You’ll typically get a lower credit limit than with a credit card, but you can generally access the full amount for cash advances. With a credit card, you can typically only use a portion of your credit line to get cash.

However, a line of credit doesn’t have the perks that make credit cards attractive to individuals. You won’t get cash back, for example, or any other kind of points or rewards. Instead, it’s a versatile way to meet ongoing or unexpected cash needs.

Can’t decide whether your business needs a line of credit or a credit card? Maybe these credit card rewards will entice you.

The final word

While a line of credit is typically used by businesses, it can be a convenient way for individuals to get access to cash or use credit to help cover expenses. Like a credit card, you can use it to make purchases, but you can also transfer money to pay bills.

However, most people opt for credit cards, because they’re easier to obtain and easier to use. With each type of credit, you get certain perks that you don’t get with the other, so choosing the right one often depends on your needs.