A line of credit and a credit card can both be great options for short-term financing. However, they’re not created equal. Check out a few key differences to help you decide which is best for your needs.
A line of credit allows you to borrow money repeatedly. While all credit cards are connected to a line of credit, you can have a line of credit that is not associated with a credit card.
A credit card comes with a predetermined credit limit and requires minimum monthly payments on the money borrowed. If you carry a balance month to month, you may be subject to higher interest rates.
A line of credit allows you to borrow up to a certain limit and repay with interest only on the amount you borrow. It usually offers a higher credit limit and a lower interest rate than a credit card. If you secure your line of credit against your home, with a HELOC (Home Equity Line of Credit), you will typically get a lower rate than a personal line of credit.
Below are basic differences between the two:
Line of Credit:
- Provides a revolving credit limit
- Borrow up to the approved limit and repay
- Gives you the freedom to borrow and repay on your own terms, providing greater flexibility in managing your finances
- Generally offers higher credit limit compared to credit cards, providing greater access to funds for larger expenses or ongoing capital needs
Credit Card:
- Comes with a predetermined credit limit.
- Requires minimum monthly payments, and if you carry a balance, you may be subject to higher interest rates
- Can be used for day-to-day expenses, such as office supplies, travel expenses, and online purchases.
To put it simply, a line of credit may make more sense for ongoing or larger expenses, while credit cards are convenient for day-to-day expenses or regular purchases, and offer many perks, including points you can use for cash back.