Line of Credit vs. Credit Card: Which Is Right for Me?
Janet Schaaf is a freelance writer, editor and proofreader who considers reader advocacy to be her calling. After taking a few roads less traveled, Janet completed a bachelor’s degree in English Literature from the University of Missouri-Kansas City, with English Department Honors. She has been correcting grammar and checking facts since she could string a sentence together. For the past three years, Janet has focused on making personal finance topics understandable and relatable. Loan terms and credit card agreements can look overwhelming, but understanding what you’re agreeing to is paramount in grasping the impact debt can have on your life.
A line of credit and a credit card are similar. Each allows you to borrow money continuously until you hit your credit limit. You’ll make minimum monthly payments and only pay interest on what you borrow.
Zooming in, you’ll see that a line of credit usually carries a lower interest rate. But you should still stick with a credit card for everyday purchases (especially if you earn rewards points). Learn more about the differences between a line of credit versus a credit card to find the option that’s best for you.
How do a line of credit and a credit card compare?
Lines of credit and credit cards are forms of revolving debt. That is to say, they allow you to borrow over and over again, as long as you have credit available.
When you apply for a line of credit or credit card, the lender will evaluate your creditworthiness by reviewing your credit score, annual income and other credit-related factors. The more creditworthy you are, the higher the credit limit you’ll likely be approved for. This is the total amount you can charge at any given point.
The charges you make are deducted from your credit limit. This leaves you with your available credit (or the amount of credit you have left to spend). When you pay down your outstanding balance, your available credit goes back up, allowing you to borrow again.
We’ll get to the nitty-gritty of how each product works, but here’s what to know first:
→ Personal lines of credit can have stricter eligibility requirements than credit cards.
→ Credit cards often carry higher interest rates.
→ Interest on a personal line of credit begins accruing immediately after you charge.
→ Most times, credit cards come with a lower credit limit.
→ You may have to pay a fee every time you use your personal line of credit.
→ Accessing cash is cheaper with a personal line of credit.
→ Both types of funding take discipline to use — it can be easy to accidentally overborrow.
What is a line of credit?
A line of credit is a type of funding that allows you to borrow by using a card or checkbook. Many times, you can also access cash from a bank or an ATM.
Some lines of credit require collateral, meaning they are secured. An example of this is a home equity line of credit (HELOC), which uses your house as collateral. An unsecured line of credit, such as a personal line of credit (PLOC), does not require collateral.
Either way, a line of credit comes with a kind of life cycle. Periods in this life cycle dictate when you can use your credit and when you cannot. Your line of credit will have a:
- Draw period: Your draw period is the length of time that you can use your line of credit. The lender will also likely require you to make minimum monthly payments on what you borrow.
- Repayment period: You can no longer use your line of credit during your repayment period. Instead, this is when you’ll pay your outstanding balance (usually in monthly installments, but sometimes as a lump sum).
The length of your draw and repayment periods can vary, but three to five years is common for both.
Interest on a line of credit also works differently than on a credit card. Credit cards get a grace period — interest doesn’t accrue until the billing cycle following a charge. On a personal line of credit, interest begins to accrue immediately.
Generally, you’ll need a credit score of at least 680 to qualify for a line of credit. And if your bank or credit union doesn’t offer a personal line of credit, you’ll probably need to join one that does. Lines of credit aren’t typically available from online lenders.
Line of credit pros and cons
| Pros | Cons |
|---|---|
Lower interest rates. APRs are usually lower on a personal line of credit versus a credit card. More funding. Credit limits tend to be higher on lines of credit. Cheaper to access cash. Many lines of credit don’t have a cash advance fee. | Strict eligibility requirements. You’ll need good to excellent credit to qualify. Possible transaction fees. Some lines of credit charge you each time you borrow. No grace period. Interest starts accruing from the moment you charge. Few (if any) member benefits. You don’t earn miles or cash-back rewards by using a line of credit. |
When does it make sense to use a line of credit?
Best for
Borrowers with excellent credit who need funds for large, ongoing but infrequent expenses.
A line of credit is flexible. Unlike with a loan, you don’t have to know exactly how much money you need. And unlike a credit card, it can provide easy access to cash. As such, a line of credit could be ideal for open-ended expenses such as home improvement or medical bills.
Beware, though: Some personal lines of credit come with a transaction fee, or an extra charge for using your credit. If you think you’ll need to borrow often, consider choosing a credit card or taking out a personal loan.
What is a credit card?
Credit cards allow you to purchase goods and services by using a card in-store or online. Each purchase ties up some of your credit, and each repayment frees up more that you can borrow (up to your credit limit).
While this sounds a lot like a line of credit, credit cards do have distinct differences. For one, you don’t have to pay interest as long as you pay your balance in full by each due date.
Also, credit cards often come with membership benefits that lines of credit do not. You can earn miles, points or cash-back rewards with every dollar you spend. Many credit cards also offer rental car insurance at no additional charge.
Credit cards are easier to find — and qualify for — than lines of credit. Of course, borrowers with good credit scores will get lower APRs. Still, you could qualify for an unsecured card with a credit score between 600 and 660.
But even if you’re the most qualified borrower, your APR will probably be higher on a credit card versus personal line of credit. That is, unless you get a 0% APR credit card (and that 0% APR only applies during the introductory period).
Finally, you won’t be restricted to a draw period when using a credit card. As long as your account is open and you have the credit available, you can continue to charge.
Credit card pros and cons
| Pros | Cons |
|---|---|
Lower eligibility requirements. You can qualify with less than good to excellent credit. Accessible. It’s easy to prequalify for a credit card online. Grace period. Interest doesn’t begin accruing until the billing cycle following your charge. Member benefits. You can earn miles or cash back rewards. | Higher interest rates. APRS are typically higher on a credit card versus a line of credit. Less funding. Credit cards usually have lower credit limits than lines of credit. Cash advance fees. If you want to tap your credit card for cash, prepare to pay a fee. |
When does it make sense to use a credit card?
Best for
Borrowers with at least fair credit and who want to earn points for everyday purchases.
By using the right cards, you could rack up credit card points to use on travel, retail purchases or cash back. And since credit cards don’t come with transaction fees (foreign transaction fees notwithstanding), they could be a good fit for repeat buys such as gas and groceries.
Using your credit card to access cash, however, can be expensive. Most credit cards carry a hefty cash advance fee if you use your credit card at an ATM or bank to withdraw cash. Cash advance APRs are also often higher than your base APR.
Line of credit vs. credit card: Which is better for your credit score?
If you’re strategic, either a line of credit or a credit card could boost your credit score. Most important, always pay your monthly bill on time, regardless of the type of credit. On-time payments have the biggest impact on your credit score (35%).
Which option is better for your score can depend on what types of credit you currently have. Your credit mix measures how much variety you have in your available credit, and accounts for 10% of your score. If you already have a credit card, adding a line of credit could give you a bump.
Also know that if you already have a lot of revolving debt, taking on more can negatively impact your credit utilization. Both types of credit also require a hard credit pull, so your score will probably get another small ding.
Long story short, it’s impossible to say which is better for your score, because everyone’s situation is unique. The only certainty is that missing payments will tank your credit score (sometimes by as much as 180 points for one late payment).
What if I don’t qualify for a line of credit or a credit card?
Unless you have a strong borrowing history, don’t bank on getting a personal line of credit. If you have bad (or no) credit, credit card issuers may turn you down, too. Don’t worry — you may have other options. Some of these alternatives may even improve your credit.
Personal loan
Best for
Borrowers with a wide range of credit scores who need money fast.
A personal loan provides a lump sum of money that you’ll pay back in monthly installments (plus interest).
If you have good credit, personal loans can come with lower APRs than credit cards. However, less-than-perfect credit doesn’t mean you’re automatically ineligible — some lenders specialize in bad credit loans. Lending platform Upstart, for instance, may accept applicants who have a score as low as 300 (although credit score isn’t the only factor they consider).
Credit-builder loan
Best for
To get a credit-builder loan, you’ll first give the lender a deposit. The lender then places your deposit in a locked savings account. To get it back, you’ll make monthly payments totalling the amount of your deposit (plus interest, in most cases).
Making on-time payments helps prove to future lenders that you can borrow responsibly. And since the lender requires a deposit, it’s more likely to approve you if you have a rocky credit history.
Secured credit card
Best for
Borrowers who are seeking to improve their credit and can pay a deposit.
Like a credit-builder loan, a secured credit card requires a deposit. Unlike a credit-builder loan, you can start borrowing immediately. Your deposit will set your spending limit, and if you don’t pay back what you borrow, you won’t get your deposit back. If you use your secured credit card responsibly, you could build up your credit and eventually graduate to an unsecured card.
Lending circle
Best for
Borrowers with imperfect credit and who don’t need money urgently.
You can get an interest-free loan by joining a lending circle. Here, a group of people contribute money that goes into a communal pot. Then, one member of the circle gets the pot once a month.
Some lending circles are informal (made up of family and friends). Others, like the Mission Access Fund (MAF), link you with other borrowers (who are strangers) and report your payments to the credit bureaus.