Credit cards and Line of Credit belong to the revolving credit category. They both have similarities by enabling you to borrow up to a certain amount when you require finance. These revolving credits do not limit you to a minimum amount you can borrow. However, they are not the same.
Before we explore their differences, let’s have an overview of what credit cards and Line of Credit are. We will also look at how each of these credit instruments works.
What are Credit Cards, and How Do They Work?
A credit card is a plastic or metal card issued by a financial institution to make purchases, pay bills, or withdraw cash, depending on the card. It’s a mode of payment that gives you a certain amount of funds to make everyday transactions online, over the phone, and in person. In reality, a credit card can be thought of as a form of short-term loan.
Credit cards can be useful in terms of convenience and saving money. At the same time, by maintaining excellent financial habits, you can use credit cards to build a solid credit history.
When you open an account with a credit card company, they set a credit limit for you. This is the maximum amount of money you can spend or pay bills with on your credit card. The amount you spend from your credit limit is then repaid to the credit card provider at the end of each month.
Several credit card companies provide a grace period during which you will not be charged interest if you pay off your entire balance by the due date. The grace period expires if you do not pay the entire balance, and the balance begins to accrue interest.
What is Line of Credit, and How Do They Work?
A line of credit is a flexible borrowing option in which you are approved for a predetermined credit limit that you can withdraw at any time. You only pay interest on the amount you borrow, not the entire credit limit. And as long as you don’t go over your total allowable amount, you can borrow, pay down, and borrow again.
It is a financial institution-sponsored loan with a set amount of money that you can use as needed and repay either immediately or over time. You can borrow up to a specific amount, and then you must repay your debt. You will be charged interest on the money you borrow, as well as a fee each time you use a credit line.
Your line of credit has no repayment deadline, so you can pay it off as quickly or slowly as you choose as long as you make your minimum monthly payments. You can also request a transfer in person, over the phone, or on your bank’s website to have money put into your account.
Credit Cards VS Line of Credit
Credit cards and lines of credit are similar in that they provide you with the funds you don’t have, but they are not the same. But what are their differences?
Let’s find out.
1. Ease of Acquisition
When applying for a credit card or a line of credit, you must give accurate financial and other personal information. Credit cards can be easily acquired and do not demand you to go through rigorous steps, unlike a line of credit.
As a result, applying for a credit line can be a little more complicated and time-consuming.
Although lines of credit are less risky than credit card loans, they do complicate a bank’s earning asset management because outstanding balances are difficult to oversee once the line of credit has been approved.
2. Terms and Limits
Lines of credit have more significant credit limits than credit cards, ranging from $5000 to hundreds of thousands for a Home Equity Line of Credit (HELOC).
The APR on a line of credit is frequently lower than the APR on credit cards, though terms vary by lender.
A line of credit’s credit limit may be higher than that of a credit card. Credit lines may be better suited to significant purchases that you plan to pay off over time because of these benefits.
A line of credit may be a better option than a credit card if you require a bigger credit limit.
How available funds are accessed or used is one of the most significant contrasts between lines of credit and credit cards.
Special checks or transfers may be required for credit lines, making accessing funds a bit more tedious. But it is easier to access the funds on a credit card since you will probably have a metal or plastic card which can be used online, in-shop, or at the ATM to access the funds.
Credit cards are a simple and easy way to make routine purchases and get back some of the amount spent through cashback or other rewards. This type of feature is not available on credit lines.
5. Interest Rates and borrowing limits
Interest rates on lines of credit are often lower than those on credit cards. Credit lines also have a higher borrowing limit, making them perfect for long-term, high-cost projects such as house renovations.
Which One is Right for You?
Both of these financial instruments are beneficial, and in reality, it’s not a crazy idea to have both. But if your income is inconsistent and you need to consolidate debt or prevent falling behind on payments, a credit line may be optimal.
On the other hand, a credit card will be your greatest bet if you need a quick means to buy your daily necessities. This is so you won’t have to pay interest on those purchases if you pay your debt in full every month.
Before signing up for a line of credit or a credit card, make sure to review the terms and conditions.
Credit cards and lines of credit are different despite their similarities. Depending on how often you need cash, how much you need, and how urgent you need funds, you might want to carefully do your due diligence in making an optimal decision.