Line of Credit Vs Credit Card: What’s the Difference?

Whether you are getting a loan for individual or business use, comparing a line of credit vs credit card is essential. These two ways of getting credit allow you to borrow money whenever you need it, up to a specific limit, instead of getting the lump sum all at once. 

However, they have significant differences. For example, the line of credit allows the borrower to get cash against a revolving credit line, while a credit card will enable you to make purchases and pay later. However, one similarity is that both have loan limits.

Borrowers must meet specific requirements to qualify for the loans. To understand more differences between a line of credit and a credit card, go through this article. It explains the differences between the two funding options, including their pros and cons. 

That said, let us get started.

What Is A Line Of Credit?

A line of credit is a credit account that lets you borrow money repeatedly until you reach your target. For example, you can make card payments or write cheques until you reach your minimum requirement and then pay later. 

A line of credit is also called a bank line or personal line of credit. Borrowers pay interest only on the borrowed amount, and the interest rates are lower than credit cards. 

A line of credit has two phases; the draw period and the repayment period. During the draw period, you can borrow and repay money freely. However, you cannot borrow money during the repayment period. Besides, you must repay the loan within the stipulated time in your credit loan agreement. 

Understanding A Credit Card

A credit card is a card you can use to purchase goods and services and pay later, with interest. These cards limit the amount of money you can borrow and rules on how to pay for debts. 

Besides purchasing goods and services, you can use a credit card to consolidate debts, boost your credit score, and earn rewards, which are redeemable points. 

A credit card resembles a debit card and gets issued by credit lenders. Some cards don’t charge interest for the first few months of usage. You must also meet specific requirements depending on the bank’s terms to qualify for a credit card. 

Credit Card Vs. Line Of Payment

Credit cards and lines of payment are means of borrowing money, but they are different in some ways. Some of them are; 

• Access And Rewards

Using a credit card makes it easy to pay for goods and services. The card also gives the users a grace period when they can borrow without paying interest. Also, continuous use of credit cards earns you redeemable rewards. 

On the contrary, a line of credit does not earn users redeemable points or cash back. They also don’t offer borrowers a grace period during which they won’t pay interests. 

• Application

Getting a credit card is easy; the borrower only provides accurate information about their finances. The lender also checks your credit score before issuing a credit card, and it must be good to qualify. 

On the contrary, getting a line of credit is a lengthy process than getting a credit card. First, the borrower must provide documents to prove their income. 

• Credit Limits

Credit cards and personal lines have a credit limit. These loan methods allow the borrower to access money up to a certain amount after which they cannot borrow. However, a line of credit offers a higher credit limit, making it suitable for big purchases. 

A Personal Line Of Credit Vs. Credit Card Pros And Cons

Now that you know the significant differences between a credit card and a personal line of payment, you can choose the most suitable one. However, before that, check the pros and cons of each. 

Pros And Cons Of A Credit Card

Before making purchases using a credit card, it’s essential to understand the pros and cons of this payment option. This will help you avoid regrets.

Pros of a Credit card

Here are the advantages of using a credit card. 

• Borrowers Use Credit cards To Build Credit

Every time you get a new credit card account, the information about the account and your borrowing goes to a credit reporting agency. They also report all the information concerning your repayments, including late and missed instalment payments

If your credit history is good, it boosts your credit score. However, if you are late on payments and monthly instalments deposits, your credit score decreases, and it will be hard to qualify for bigger loans. 

• A Credit Card Is More Secure Than Cash

If you lose a credit card, the credit card company blocks it to prevent fraudsters from drawing money from it. The company also monitors suspicious activity on your credit card to detect inconsistency. Unfortunately, you can hardly get cash back if you lose it. 

• Gaining Reward Points

You can gain reward points with a credit card, depending on the usage and the company’s terms. These points are redeemable, and you can use them to pay off your balance. 

Cons of a Credit Card

• Big Loans Could Be A Disadvantage

Getting a new credit card could offer you a bigger limit, making it easy for borrowers to overspend. Also, paying for huge loans becomes a problem; if you are stuck, it could spoil your credit score. 

• High-Interest Rates

Credit cards allow you to access huge amounts of money, but their annual interest rates are high. This is a loss to borrowers because the cards also charge more interest if you are not consistently paying your monthly balance. 

Advantages and Limitations of a Line of Credit

Personal loans or a line of credit has pros and cons that you should consider before getting one. Some of them are;

Advantages of a Line of Credit

• You Can Make High Purchases

Line of credit users has access to high credit limits. As a result, it allows them to buy costly items that a credit card cannot because of the low limit. 

• Easy Approval

Line of credit takes a short time for approval. Therefore, users can use the money for emergencies like medical bills and purchasing essential items. Besides, you can get lump sums within a day of applying. 

• Low-Interest Rates And High Borrowing Limits

Line of credits has low-interest rates, unlike credit cards. Also, the interest is levied only on the money borrowed. As a result, users of lines of payment get high borrowing limits, making it more convenient for businesses and people who spend a lot. 

Limitations of a Line of Credit 

• Have More Eligibility Requirements

Unlike credit cards that check your credit score for you to qualify for a loan, borrowers of personal loans must provide more information to qualify. Also, if you have a short financial history, it will be challenging to get a loan. 

• Monthly Payments

A line of credit requires the borrower to make a monthly payment. This is an extra amount to be deducted from your earnings, and it can mess up your budgeting. 

Final Words

Differentiating line of credit vs credit card can be challenging if you don’t know how each of them works. Therefore, this is the first step to choosing the method of getting the credit you want. Ensure you also check the pros and cons of each before deciding.