Both credit cards and lines of credit let you borrow money when you need it and pay it back at a later time. The two forms of credit operate in a similar way, allowing you to make purchases in any amount up to your borrowing limit and then make payments in variable amounts with monthly minimum payments required. This post covers many common questions about lines of credit and credit cards to help you decide which type of credit best suits your needs.
A line of credit is a type of revolving credit that gives you access to funds up to a certain preset amount. As you pay down your balance, more funds become available to you.
A line of credit works differently than a credit card. It has a draw period for using your credit and a repayment period for paying it back. The terms for the following periods are detailed in your agreement with your lender:
While most personal lines of credit are unsecured, you can also apply for a secured line of credit ― a type that requires collateral. Common types include home equity lines of credit (HELOCs), in which you borrow money against the equity in your home, and CD-secured lines of credit, which require you to put down money in a certificate of deposit. With secured lines of credit, lenders may seize the assets you put down as collateral if you fail to make payments.[1]
A credit card is a form of revolving credit that allows cardholders to make purchases as needed and pay the money back as they can, as long as they make their minimum monthly payment. If you pay back your previous statement balance by the due date, you will not have to pay interest. However, in the event that you carry a balance from one month to the next, credit card companies will charge interest and include it on your next statement.[2]
Although lines of credit and credit cards share some similarities, they also have several key differences to consider when deciding which works best for your personal finances.[1]
Personal Lines of Credit | Credit Cards | |
---|---|---|
Approval | Usually based on credit score, financial information and proof of income | Usually based on credit score and financial information, including income |
Usage | Primarily used to make large purchases | Primarily used for making smaller, everyday purchases |
Rewards | Usually don’t offer rewards | Some credit cards offer rewards like flight miles or cash back |
Interest rates | Usually have lower interest rates | Usually have higher interest rates |
Grace Period | No grace period for payment | Grace period between the end of your billing cycle and when payment is due (minimum 21 days) |
Banks and other lenders typically base approval for any type of credit, credit limits and credit terms on the borrower’s creditworthiness. Lenders check your credit score and other elements of your financial profile to make their decisions. To apply for a line of credit, you may need to submit financial documents, such as bank statements.[3] To apply for a credit card, you will need to provide financial data such as income and housing costs. Some credit card issuers offer preapproval letters, which simply indicate that you are likely (but not guaranteed) to qualify for their financial products.[4]
Unlike installment loans, credit cards and credit lines only charge interest on the outstanding average balance on your account. (You should review your credit agreements to understand how the lender calculates the average balance on your account.) Lines of credit, however, tend to have one crucial advantage over credit cards: a lower interest rate. Although interest rates vary, according to CNBC, as of September 2022, credit lines have an APR range of 9.30% to 17.55%, while credit cards range from 8.99% all the way up to 29.99%. [1] [5]
According to Forbes Advisor, as of November 2022, the average interest rates for home equity lines of credit are as follows*:
Interest rates on lines of credit vary significantly by financial institution and the creditworthiness of the borrower.
Unlike some other loan types with fixed interest rates, lines of credit have variable interest rates that may fluctuate over time. For example, U.S. Bank bases its APR on the Prime Rate plus a margin. So as the Prime Rate fluctuates, so does the APR.[7] Finally, rates may also vary based on the type of account you may have with the bank. Citbank’s variable-rate lines of credit range, as of November 2022, from 18.25% to 21.25%, depending on account type and package.[8]
The average interest rates for credit cards are as follows*:
Although credit cards are convenient, they often come with fees to consider. Besides interest charges, cardholders may have to pay late fees, annual fees, foreign transaction fees, balance transfer fees and cash advance fees.[2] Lines of credit generally don’t charge extra for making cash withdrawals, but you may want to ask your lender about annual fees, early repayment fees and any other fees that may be associated with your account.[10]
Note that if you do not carry a credit card balance and pay your statement balance by your due date, no interest charges will be added to your account. By contrast, lines of credit do not generally have grace periods.[1]
Lenders set borrowing limits on both unsecured credit cards and lines of credit based on the borrower’s credit score, credit history and other financial factors.[12] Limits on unsecured lines of credit range from $300 to $100,000 or up to 85% of home equity on a secured HELOC. High-limit credit cards may allow as much as $500,000 in spending, which is rare, but $10,000 or less is more common.[1] The limit on secured credit cards usually equals the amount of money put down in a certificate of deposit or savings account as a security deposit. Intended to help borrowers with poor credit or no credit, secured cards often make a good choice for those looking to get credit from scratch.
To help you decide which type of credit is right for your financial situation, consider the following pros and cons of lines of credit.
Pros:
Cons:
While not all types of credit cards are identical, you may consider the following advantages and disadvantages generally associated with credit cards.
Pros:
Cons:
[2]
Both credit cards and credit lines can affect your credit score for better and for worse, depending on how you manage them.[1]
When used responsibly, credit cards can play an important role in building credit. By paying your bills on time you may see your credit score increase. However, if you miss payments, make late payments, use a high percentage of your limit, or default on your credit card altogether, your credit score will likely decrease.[2]
Similar to credit cards, lines of credit can have a positive impact on your credit score if you manage them carefully. They can contribute to your payment history, total available credit and diverse mix of credit types – all important factors in your credit score. However, if you fail to make the minimum monthly payment or default altogether, you will likely see your score drop.[1]
In addition to weighing the pros and cons of credit cards and credit lines, you may want to think about your financial situation before you choose a line of credit or credit card.
Consider a line of credit when:
Consider a credit card when:
Both credit cards and lines of credit offer a convenient, flexible way to borrow money. While credit card options are available to individuals with a range of credit scores, credit lines are often more accessible to those with better credit. To build your credit prior to applying for a credit line or unsecured credit card, you may consider Self’s Credit Builder Account and secured credit card. Both options can help consumers build their credit — whether you have a bad credit history or no credit at all.
Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.
Our goal at Self is to provide readers with current and unbiased information on credit, financial health, and related topics. This content is based on research and other related articles from trusted sources. All content at Self is written by experienced contributors in the finance industry and reviewed by an accredited person(s).