Thursday, 27 January 2022

Personal Line of Credit vs. Credit Card: Which Is Best for You?

Personal Line of Credit vs. Credit Card: Which Is Best for You?
12 Oct

Credit cards and lines of credit are revolving credit accounts. Your account will have a credit limit — the most you can borrow at a time — that the issuer or lender will assign you based on your creditworthiness.

Unlike an installment loan, which you must repay in predetermined fixed payments over a specific term, a revolving account allows you to borrow against your credit line, repay the loan and borrow against it again without having to apply for a new loan. You may also be able to make small monthly payments, and your total repayment period can vary depending on how much you choose to pay.

Although they share some similar characteristics, credit cards and credit lines may be best used in different circumstances. See the key aspects of both in this chart and then dive in below to learn how personal lines of credit and credit cards work.

  Personal Line of Credit Credit Card

Type of Account

A secured or unsecured revolving credit line

A secured or unsecured revolving credit line

Generally Issued By

Banks, credit unions and online lenders

Banks, credit unions and credit card issuers

Interest Rate

A variable or fixed rate

The rate often ranges from around 4% for secured lines to over 20% with unsecured lines.

Generally a variable rate

Cards may have different rates for purchases, balance transfers and cash advances Purchase rates are around 15.5% on average

Potential Fees

  • Annual fee

  • Late payment fees

  • Cash advance or draw fee

  • Origination fee

  • Closing costs (for HELOCS)

  • Annual fee

  • Late payment fees

  • Cash advance fees

  • Balance transfer fees

Credit Line

Issuers may have a preset potential range, but your credit limit can depend on your creditworthiness. Secured credit line limits may depend on the value of the collateral

Unsecured lines could be for hundreds of thousands, and there are secured lines with several million dollar limits

The credit limit can vary depending on your creditworthiness and the credit card. The limit generally won’t be as high as what’s offered on credit lines

Minimum Draw Amount

There could be a minimum draw amount, such as $500 per draw

No minimum

May Be Best For

When you expect to take out a series of small loans or want an emergency loan option

Managing daily or monthly expenses, or when you can leverage a promotional interest rate offer or rewards program

How a line of credit works

A personal line of credit gives you the ability, but not obligation, to borrow money as needed. Your credit limit can depend on your creditworthiness and the lender, but you can take out smaller loans against your total limit.

You may only have to pay interest on the amount you borrow, although that interest could start to accumulate right away. You may also have to pay an annual fee, often around $25 to $50, to keep your account open, even if you don’t use the account.

Depending on the account, you may be able to make a draw as a cash withdrawal, bank transfer or with a check linked to the account. Some accounts charge a fee on your withdrawals — or draws, as they’re called — depending on how you get the money.

Once you’ve taken a draw, you may only have to make minimum monthly payments on your loan, although paying more than the minimum could limit how much interest accrues. Or, each of your loans may have a fixed repayment period and set monthly payments.

Some personal credit lines may have an initial draw period — a several-year period when you can take draws against your credit line. You may need to make at least minimum payments during the draw period, and once it ends and your repayment period starts your monthly payments may increase.

Personal credit lines may be unsecured or secured. Secured lines of credit require you to put up collateral, such as funds in a certificate of deposit account or your home (for a home equity line of credit or HELOC) that the creditor can take if you don’t repay your loan. A secured line of credit may have additional fees, such as closing costs on a HELOC, but you may be able to get a much larger credit line. Unsecured credit lines are offered to borrowers based on their creditworthiness and promise to repay the loan.

When to use a line of credit (and when not to)

Opening a line of credit could be a good idea if have a series of upcoming purchases to make. Say, for example, that you’re renovating a room in your home and will make progress payments to a contractor before purchasing new appliances or furniture later. Rather than taking out one large loan and paying interest the entire time, you can take out several smaller loans from your credit line and minimize how much interest accrues.

You may also be able to find a line of credit that doesn’t require any annual fees. Keeping a personal credit line open could be an OK option as an emergency fund. Although ideally, you can save up enough cash to build an emergency fund, a credit line could help you get cash at a predetermined (and hopefully low) interest rate.

A credit line isn’t likely the best option for regular expenses, as you’ll end up taking out, managing and paying interest on multiple draws. If you find yourself frequently short on money, focusing on decreasing your expenses or increasing your income should be a top priority.

Additionally, if you need to take out a single loan for a specific purpose, you may want to use a personal loan rather than a line of credit. Personal loans are installment loans that can be secured or unsecured, and you may be able to qualify for a lower fixed or variable rate than you could get with a credit line.

How credit cards work

A credit card also gives you access to a revolving credit line. Your card will have a credit limit — the highest your balance can go before the card issuer starts declining your transactions.

During your billing period, purchases, balance transfers, fees, interest charges and other transactions can increase your balance. When your billing period ends, the card issuer will send your credit card statement with a summary of your transactions, your current balance and your required minimum payment. Your next billing period will begin right away, although the bill you just received generally won’t be due for another 21 to 25 days.

If you continually pay the entire balance on your credit card statement and your card has a grace period (as many do), then you won’t have to pay any interest on your purchases.

However, you can pay less than your entire balance, all the way down to a minimum payment — which may be just $15 to $30 depending on your card and balance. If you pay less than the full amount, then the unpaid portion will be carried over to the next month and start to accrue interest. Additionally, any new purchases will begin to accrue interest immediately.

When to use a credit card (and when not to)

A credit card could be a good option for making regular purchases. You may have over 50 days from the start of your billing period to your bill’s due date, which gives you some flexibility to manage your cash flow. You also won’t pay interest on your purchases if you can pay your bill in full each month. You could even earn rewards with your purchases, such as cash back or points in travel loyalty programs.

There are also promotional rate and balance transfer credit cards that offer a temporary 0% interest rate on new purchases or balances that you transfer to the card. Using one of these offers could help you finance a large purchase interest-free, or transfer and pay down debts without accruing interest.

However, getting the most out of credit cards require financial and personal discipline, and might not be possible for someone who is struggling to stay on top of monthly bills.

Falling behind and making a less-than-full payment can lead to your balance accruing daily interest at a potentially high-interest rate. Even the promotional rates can eventually turn into a high rate, and if you’re unable to follow through with a plan to pay off the balance you could be left with a large high-interest debt.

For those who tend to make impulse purchases, even the best-intentioned plans could come crashing down. If you have several credit cards with a balance and then transfer the balances onto a zero-interest balance transfer card, you’ll now have multiple cards with an available credit limit. Max those out and you could be faced with even more credit card debt than you had at the beginning.

Bottom line

Credit cards and lines of credit are both revolving accounts, but they may be best used in different circumstances.

A credit card can be best for day-to-day purchases if you can afford to pay the bill in full each month. Additionally, using promotional rates and offers could sometimes save you money. However, credit cards’ high-interest rates can make paying off credit card debt difficult once you start revolving a balance.

A line of credit could be helpful if you have a series of upcoming expenses to finance, or if you want to open an account that you can tap during emergencies. But beware of minimum and maximum draw amounts and your overall cost if you don’t have a fixed repayment term for your draw.

No matter which type of account you want to open, always compare your options first. Both credit cards and personal lines of credit may offer different interest rates, terms and fees depending on the creditor, and you want to find the best fit possible.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Louis DeNicola


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