Line of credit vs. credit card: What’s the difference?

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A line of credit and a credit card are very similar types of revolving credit. With both, you’re approved to borrow up to a certain amount, but you don’t have to borrow any money immediately after you’re approved. You can choose when to borrow and how much, up to the account limit. You pay interest only on the amount you borrow and you can borrow again and again, as long as you don’t owe more than the limit.

However, there are some important differences between a line of credit and a credit card. Here’s what you need to know when it comes to a line of credit vs. credit card.

Line of credit vs. credit card: What’s the difference?

One of the most notable differences between the two is that while a credit card is connected to and allows you to access a line of credit, it’s possible to open a line of credit that doesn’t have a card associated with it. Basically, all credit cards are lines of credit, but not all lines of credit are credit cards.

Credit terms and limits

While terms vary by lender, the APR on a line of credit is often lower than the APR for credit cards. And the credit limit for a line of credit may be higher than for a credit card. These advantages may make credit lines better suited to large purchases that you intend to pay off over time.

Access and rewards

Credit cards provide a convenient way to make purchases on an everyday basis. They often give you a grace period during which you can avoid paying interest, a feature that isn’t available for lines of credit. And many credit cards offer cash back or other rewards for spending, which credit lines do not.

Application requirements

Applying for a credit card requires you to provide accurate information about your finances, while applying for a line of credit without a credit card typically requires documentation to prove your income. This means it can be a little more complicated and time consuming to apply for a credit line.

What is a line of credit?

A line of credit is a financial product that allows you to borrow money repeatedly. You can borrow up to a certain limit, and then you repay what you owe. You can continue drawing on the line of credit as long as the amount you owe doesn’t go over your limit. You pay interest on the money you borrow, and you may be charged a fee each time you use a credit line.

How does a line of credit work?

Your issuer gives you checks you can write to access your line of credit. You can also have money deposited in your bank account by requesting a transfer in person, by phone, or through your bank’s website. You may also be able to arrange for your bank or credit union to automatically draw on your credit line to cover overdrafts on your checking account.

Lines of credit can be secured or unsecured. Home equity lines of credit are secured by your home, for example. They usually come with variable interest rates, but banks sometimes offer a fixed rate option on part or all of your balance. They often have a draw period, which is a time when you can borrow money. After the draw period, you may be required to pay the total amount you owe right away, or you may be given a window of time during which you can make payments.

A personal line of credit is not secured. To be approved, you may need to have an existing checking account with the bank or credit union that’s issuing the credit line. After you borrow, you’ll receive a bill each month, and you’ll need to make at least a minimum monthly payment. The interest rate can generally rise or fall depending on market conditions.

Does a line of credit affect your credit score?

Opening a new line of credit can affect your credit score in a number of ways, for better or worse, and so will how you manage that credit moving forward. Here’s how a line of credit affects your credit score:

  • New inquiry: When you apply for a line of credit, the lender makes a hard inquiry on your credit history, which will appear on your credit report for two years and can impact your FICO score for up to 12 months.
  • Length of credit history: Opening a new line of credit decreases the average age of your accounts. This can lower your credit score, particularly if you don’t have a lengthy credit history.
  • Credit mix: When you open a credit line, you add a revolving credit account to your credit history, which can improve your credit mix if you didn’t previously have any revolving accounts. Having a variety of different types of accounts to your name may raise your credit score.
  • Amounts owed: Drawing on a personal line of credit affects your credit utilization ratio, which is the amount of revolving credit you’re using divided by your credit limit. While how much you’ve borrowed through a HELOC is not considered by FICO when determining your credit utilization ratio, it does consider HELOCs in calculating the amount of money you owe. Having a large amount of debt from a HELOC or other accounts can lower your credit score.
  • Payment history: Making on-time monthly payments on your line of credit builds your payment history and can raise your credit score, while paying late or missing payments will likely cause your score to fall.

When should you use a personal line of credit?

A personal line of credit can be useful when you need to make a large purchase, pay for emergency spending or when you can’t predict the exact dollar amount you’ll need to borrow up front. For example, if you have to pay for some surprise home repairs or if you have out-of-pocket costs for ongoing medical treatments but you aren’t sure of the number of bills you’ll get or the total cost. A personal line of credit gives you more flexibility than a one-time personal loan and the terms may be more favorable than a credit card when it comes to carrying a larger balance you need to pay off over time.

What is a credit card?

A credit card is a payment method that allows you to draw on a line of credit to make everyday purchases online, over the phone and in person. Charging payments to the card by physically swiping or inserting the card in a terminal or by entering the card’s number, expiry date and security code into an online payment form adds to the account balance and reduces the available credit by the amount of the purchase.

How does a credit card work?

For each billing cycle, cardholders receive a statement. Many credit cards offer a grace period, meaning that interest isn’t charged if you pay the entire balance by the due date. If the cardholder pays less than the full balance, they lose the grace period and the balance begins accruing interest. They also now owe interest right away on new purchases.

Cardholders must make at least a minimum payment every billing cycle by the due date, or they typically face late fees and may be subject to a penalty APR.

Some credit cards offer rewards that you earn by charging purchases to the card. Depending on the type of card, you may earn cash back, points or miles on purchases, which you can redeem for statement credits, airline miles, gift cards and more.

How does a credit card affect your credit score?

A credit card account can affect your credit score much like a line of credit.

  • New inquiry: Applying for a new credit card leads to a hard inquiry being entered in your credit report, which can temporarily lower your score.
  • Length of credit history: Opening a new account reduces the average age of your accounts, which can also lower your score.
  • Credit mix: As with a line of credit, taking out a new credit card gives you a revolving account. If you previously lacked a form of revolving credit on your record, this improves your credit mix and may raise your score.
  • Amounts owed: Charging purchases to a credit card raises your credit utilization ratio. A high credit utilization ratio can make it look like you’re at risk of using up all of your available credit and may lower your score. It’s typically recommended that you keep your credit utilization ratio under 30 percent to maintain a good credit score.
  • Payment history: Paying your credit card bill on time each billing cycle adds to your payment history and can boost your score. There is no penalty to your score from paying your balance in full. In fact, credit card issuers report the balance on your monthly statement to the credit bureaus, so leaving a balance on your card doesn’t change what was reported for that month.

When should you use a credit card?

Credit cards are useful when you want to have a means of payment on hand without carrying cash. It’s smart to use a credit card for everyday spending when you’ll be able to pay your credit card bill in full each month. That way you’ll avoid paying interest and you won’t run up credit card debt you can’t afford to pay off.

Using rewards credit cards is a great way to actually get rewarded for your spending, especially when you can earn big in categories you tend to spend money on anyway, like groceries, dining or gas. If you have a large purchase in mind it can be worth finding a card that offers a 0 percent introductory APR so you can pay off the balance over time without interest.

Credit cards provide more significant protections against fraud than some other payment methods, including debit cards. Many credit card issuers offer cardholders $0 fraud liability. Thus, a credit card is often a good choice if you’re concerned about security, such as when traveling or shopping at online retailers.

Alternatives to credit

If you’ve considered a credit card or a personal line of credit and neither seems like a great option, it may be time to explore alternatives to borrowing.

  • Work on saving: One possible approach is to save up for a big purchase rather than financing it. The drawback is that you have to wait until you have sufficient funds to buy the item. On the plus side, you don’t pay interest.
  • Find community resources: You could also see if your community has a freecycle group or a mutual aid group. These organizations sometimes offer used furniture or appliances that other group members no longer need.
  • Rent what you need: If you can’t afford to buy a product you need for a short time, you could look into renting it. A wide variety of items are available for rent, from sports gear and home improvement tools to wedding dresses and textbooks.
  • Ask for a direct payment plan: If you need money for necessities like utility bills or medical care, you could ask for help. Utility companies and hospitals often provide financial assistance to people who aren’t able to pay full price. If you don’t qualify for a discount, they may offer you a payment plan with better terms than you’d get from a credit card issuer or bank.