Lines of credit (LOC) are popular with businesses and property owners because they offer flexible interest and payment terms. Individual customers, on the other hand, prefer to use credit cards that serve as payment cards, rewards, and offers. Technically, a credit card is a type of unsecured LOC, but there is a significant difference between the two. Let’s discuss what a line of credit is, how credit cards function, and the key differences between lines of credit vs credit card.
What is a Line of Credit?
A line of credit is a predetermined credit limit that allows you to borrow any amount, repay, and borrow again until the line of credit is closed. A LOC is used for a variety of personal or business purposes, such as expanding your business or paying off debt.
In fact, you can pay your bills (personal or business) because it is less expensive than other traditional debt repayment methods.
A few examples of lines of credit are the personal LOC, the business LOC, home equity LOC (HELOC), the demand LOC, etc.
How does a Line of Credit work?
When you request a line of credit, your finance provider will typically conduct a credit check and determine how much money he can lend to you based on your financial behaviour. That is the maximum amount you can borrow from a credit line.
They provide an agreement, and you can agree to take secured or unsecured, revolving or non-revolving LOCs based on your needs. Unless specifically stated otherwise in the agreement, most LOCs are revolving (open-ended – allowing you to borrow frequently).
What is a Credit Card?
A credit card is a payment card that allows you to make credit-based payments (pay bills, shop online, etc.). You can make payments with credit cards, and each month you repay the amount you borrowed.
Credit cards typically have an annual percentage rate (APR), which is a yearly interest rate that you must pay if you do not pay your credit card bills on time.
How does a Credit Card work?
When you apply for a credit card, the credit card company will run a credit check and determine a credit limit that you can use. Once you’ve received your credit card, you can use it to borrow money for online or in-store purchases, as well as bill payments.
You must repay the loan in full or in instalments. When you repay in instalments, you must also pay interest.
Line of Credit vs Credit Card
| Point of Difference | Line of Credit | Credit Card |
| Purpose | An LOC can be used to borrow any amount of money as many times as you want. | A credit card is used to borrow money for a short period of time in order to make payments. |
| Credit Period | Most LOCs are available for a longer period of time, up to 15 years in the case of HELOCs. | Credit cards have a shorter credit period, which varies from borrower to borrower. |
| Interest Rates | Interest rates on LOCs are typically lower than those on credit cards. On the other hand, LOCs have hefty late payment fees. | Compared to LOCs, credit cards have higher interest rates. |
| Effect on Credit Score | If you use more than 30% of your available credit, your credit score will be negatively affected. | A credit card can significantly impact your credit score. It is one of the most important factors to consider when determining your credit score. |
| Rewards | LOCs do not provide any incentives or offers. | Credit cards offer enticing promotions and rewards. |
| Credit Score to Maintain | A personal LOC will require a credit score of 670 or higher. | A credit card will require a credit score of 700 or higher to qualify for better offers. |
How to decide whether to use a Line of Credit vs Credit Card
You don’t have to choose between the two; you can have both a line of credit and a credit card. However, one of these lending products may be more appropriate for specific situations and transactions.
1. Lines of Credit are ideal for large purchases
Lines of credit typically have credit limits that range to six figures, depending on your credit history and lender. They typically have lower interest rates, at least when compared to credit cards. Because of the high credit limit and low-interest rate, a line of credit is useful for large transactions and unexpected purchases.
A credit line may be useful when:
- You require a larger credit limit.
- You intend to take more than a month to repay a large balance.
2. Credit Cards are ideal for everyday spending and reward earning
Credit cards can be used for both in-person and online purchases, and they may earn rewards. As a result, credit cards are a convenient option for everyday spending. However, credit cards have higher interest rates than lines of credit, which means you may pay more interest on borrowed funds if you do not pay your balance in full each month.
A credit card may be useful if:
- You only need a small sum of money to get started.
- You are able to pay off your balance each month, or at least pay more than the minimum payment amount.
- You want to take advantage of any points or rewards programmes that are available.
Conclusion
When deciding between a line of credit and a credit card, it’s important to consider your financial needs and spending habits. If you require a larger sum of money for a specific purpose and prefer more structured repayment options, a line of credit may be the better choice. Conversely, if you need a flexible and convenient payment method for smaller purchases and everyday expenses, a credit card would be more suitable.
Regardless of your choice, responsible financial management is crucial. It’s important to make payments on time, avoid carrying excessive debt, and regularly monitor your spending to maintain a healthy credit score. Both a line of credit and a credit card can be valuable tools when used wisely and in line with your financial goals.
FAQs
1. What is the difference between a Credit Card vs Line of Credit?
Ans: A credit line card is a line of credit that allows you to borrow money up to a credit limit set by your finance provider. Credit cards allow you to buy goods or pay bills on credit using a payment card.
2. What number of Credit Lines should I have?
Ans: You can have up to five lines of credit if you don’t have any credit card or other debt. However, the more you borrow (via various debt instruments such as credit cards and loans), the fewer credit lines you should have.
3. What is the difference between a revolving Line of Credit and a Credit Card?
Ans: A revolving LOC is an open LOC that allows you to borrow any amount up to a credit limit as many times as you like. In other words, with a revolving LOC, you can borrow, repay, and borrow again. You can also borrow, pay, and borrow again with credit cards.
4. How frequently are Credit Card limits increased?
Ans: If you pay your credit card bills on time, most banks will increase your credit card limit every year.
5. Which is better: a Credit Line or a Credit Card?
Ans: A line of credit is less expensive than a credit card because it allows you to borrow money at a lower interest rate. Credit cards, on the other hand, provide rewards, cash back, and other perks.
