Line of Credit vs. Credit Card

When you need to borrow money, you may have a choice to make: line of credit vs. credit card. But what's the difference and which one is better? Here, we'll walk you through your options.

What is a line of credit?

A line of credit allows you to access money when you need it. It's not exactly the same thing as a loan, because when you take out a loan, you borrow a specific amount from the start. When you get a line of credit, you get access to a sum of money you can borrow against as needed. And generally, you can borrow that money for any reason.

Say you qualify for a $10,000 line of credit. You may not borrow that entire $10,000. Rather, you may decide you only need to borrow $6,000. In that case, you wouldn't be charged interest on the remaining $4,000.

There are different ways to secure a credit line. One option is via a home equity line of credit, or HELOC. This option is available to property owners with enough home equity. It's also possible to apply for a line of credit through your bank.

What is a credit card?

A credit card is a financial tool that allows you to borrow money as needed by acting as a payment option for you. When you charge an expense on a credit card, you don't need to fork over the cash right away. Instead, you simply pay your credit card bill every month. If you can't pay your credit card bill in full, you can make your minimum monthly payment instead. Doing so will cause you to rack up some interest on your balance, but it won't harm your credit score.

A credit card actually gives you a line of revolving credit, because you get a spending limit you can charge against (that amount can change over time). That credit limit is based on factors like your credit score and income. Unsurprisingly, the average credit card limit varies when looking at different age groups.

What are the benefits of a line of credit?

When you need to borrow money, a line of credit can be a good choice for these reasons:

• Affordability. With a credit line, you'll often get a lower interest rate than you will with a credit card.
• Easy to qualify. If you're getting a HELOC, a lender will base its decision largely on the equity you have in your home, which means you may qualify for a line of credit even if your credit score is only fair.

What are the benefits of a credit card?

Credit cards have their advantages, too:

• Cash back or rewards. When you charge expenses on a credit card, you can earn rewards or actual cash back for making those purchases.
• 0% introductory APRs. Some credit cards offer a limited period of 0% interest, so if you need to borrow on a very short-term basis, you can avoid racking up interest charges with a 0% credit card APR.
• No collateral needed. A HELOC is secured by your home itself, and if you fall behind on your payments, you risk losing your home. Credit cards are unsecured, and while falling behind has negative consequences, you don't risk losing a specific asset. It's worth noting that not all lines of credit are secured by an asset, though.
• The option for a higher credit limit. Once you're a credit card account holder, you can ask your card issuer to increase your credit limit without having to apply all over again.

What are the drawbacks of a line of credit?

Borrowing via a line of credit has its downsides:

• Limited time to borrow. You get a specific time frame to draw from your line of credit. In some cases, that time frame may be lengthy (a HELOC might give you up to 10 years) but in some cases you may only get a couple of years. With a credit card, you can charge expenses as long as you keep that account open. It's possible to have the same credit card for 25 years or more, for example.
• Collateral may be required. Some credit lines, like HELOCs, hinge on having an asset to secure them. If you don't own such an asset, you may not be able to borrow. And if you fall behind on a HELOC, you risk losing your home.
• No rewards. Paying off a line of credit could help you build credit, which could help your credit score improve. But beyond that, there are no rewards for borrowing via a line of credit.

What are the drawbacks of credit cards?

When you choose a credit card over a line of credit, you may encounter these downsides:

• High interest rates. You'll generally pay more interest on a credit card balance than you will with a line of credit.
• Annual fees can be high. Some credit cards charge an annual fee just to keep your account open. Many credit lines don't charge an annual fee.
• Less borrowing power. Compared to a line of credit, you'll usually have a lower borrowing limit with a credit card.
• The need for good credit. Credit card charges aren't generally secured by an asset. As such, you may need good credit to qualify for a credit card with favorable terms. (There is such a thing as a secured credit card that works differently, but for the purpose of this discussion, we're talking about unsecured credit cards.)

What's the right choice for you?

If you're looking for more flexibility with day-to-day purchases, then a credit card is generally a smart choice. Using one can help you manage your cash flow more easily. But if you want the option to borrow a larger sum, then a line of credit may be more appropriate, since you'll generally get a higher limit than you will with a credit card.

Remember, it's possible to borrow money temporarily via a credit card and avoid paying interest. That'll happen as long as you pay off your entire balance by the time it comes due, as opposed to just your minimum payment. With a line of credit, any amount you borrow will accrue interest, so it doesn't generally make sense to use a credit line for everyday purchases.

No matter which option you choose, make every effort to keep up with your credit card or credit line payments. Falling behind could have major consequences in both situations, like damage to your credit score that could make it harder to borrow affordably the next time you need to. On a positive note, if you're timely with your credit card or credit line payments, your credit score could improve nicely.

Still have questions?

Some other questions we've answered:

• What's the difference between a line of credit and a personal loan?
• What are the best credit cards?
• What are the pros and cons of credit cards?