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

If you need cash for an upcoming purchase or project, a credit card may not be the best way to cover the bill. Credit cards have higher interest rates than most other financial products, so they can be expensive to use if you can’t pay your balance off right away. 

For someone with a good credit score, a line of credit could be a better option, since it gives you ongoing access to quick cash, and often at much lower interest rates than credit cards. 

What is a line of credit?

A line of credit is a loan from which you can borrow and repay an unlimited number of times over a set period of time — the length of which depends on the type of loan you get. After that initial draw period ends, you can no longer borrow funds and enter a repayment period where you pay back your balance, plus interest, in monthly payments. Or, you may be required to make at least a minimum monthly payment against the funds you borrowed. Some of the most common types include personal lines of credit, a business line of credit or a home equity line of credit.

Some lines of credit are unsecured, which means you don’t have to offer collateral against the loan, but there are also secured lines of credit. Home equity lines of credit (HELOC), for example, are secured loans that require you to use your home as collateral.

Pros and cons

• Access to cash on an as-needed basis.
• Can help you improve your credit scores.
• Interest rates are typically much lower than credit cards. 
• You may need good credit and/or collateral to qualify.
• Your collateral can be seized if you miss payments on a secured line of credit.
• The lender can reduce your credit limit without informing you.
• You may eventually have to pay off the balance in a lump sum. 
• You may have to pay off the full balance once a year.

What is a credit card?

A credit card is a payment method that allows you to cover a purchase with borrowed money. If you pay back what you borrowed before the monthly due date on the card, you can avoid adding interest charges to what you owe. 

If you carry a balance, however, you’ll have to make a set, minimum payment each month in order to avoid late fees, and you’ll also be charged interest on the full balance. The average annual percentage rate (APR) on a credit card is currently higher than 20%.

Pros and cons

• Usually easier to obtain than a line of credit.
• Some cards are available for people with poor credit.
• Using a credit card can help improve your credit scores.
• Users may earn rewards for their purchases.
• High APRs make them more expensive than most financial products.

Line of credit vs. credit card: Key differences

Lines of credit and credit cards are similar, but can have different rules for borrowing and repayment. With a line of credit, your borrowing activities are limited to a specific time period. You can borrow money during the initial draw period and you must pay it back during the repayment period. Then, the account will eventually close on a set date. 

With a credit card, however, you can borrow up to your card’s credit limit and repay the money repeatedly over an open-ended period of time. As long as the account is in good standing, it won’t be closed.

Another key difference is that a line of credit can give you easy access to cash, while credit cards do not. If you want to draw money from your credit card account, you’ll have to take out a cash advance. The APR for a cash advance can reach nearly 30% and you begin accruing interest charges right away.

Line of credit vs. credit card: Key similarities

While credit cards and lines of credit are different, they have some main features in common: 

• Account limits are based on your credit and income.
• Minimum monthly payments are required if you carry a balance. 
• Interest fees are assessed on your outstanding balance.
• There may be annual fees and fees for late payments.
• Your account activity will impact your credit reports and scores.

Which is the better option for you?

A line of credit can be a good alternative to a credit card if you have strong credit scores and if you need cash for an open-ended project. For example, if you’re renovating your home and unsure what the total cost will be or when you’ll need to pay contractors. 

For everyday purchases and for building long-term credit history, a credit card is likely the better choice. Credit cards can be easier to qualify for those without great credit and your account can stay open as long as it’s in good standing. Just be aware that carrying a balance from month to month can result in high interest charges that can add up fast and make it difficult to get out of debt.

Frequently asked questions (FAQs)