Personal Line of Credit vs. Credit Card: Which Makes More Sense?

Often, consumers find they need of extra funds in order to meet specific needs or finance a purchase. Two options that appear similar but have definite pros and cons are the credit card and the personal line of credit. Check out their similarities and differences before choosing one or the other.

Credit Cards

  • Credit cards are easier to obtain because income is often not verified.
  • Interest rates are usually higher for credit cards than personal credit lines.
  • Cash advances are obtainable, but there ate transaction fees and the interest rate is higher than for purchases.
  • Credit cards usually limit cash advances to about 20 percent of the total credit line.
  • Credit card limits may be lower than personal credit lines.
  • Credit cards have a grace period following a purchase – you owe no interest if the balance is paid in full.
  • Some credit cards offer rewards for using them.
  • Not all vendors accept credit cards because if the fees that issuers charge merchants who accept them.
  • Might be safer for online shopping because they are not attached to a bank account.

Personal Lines of Credit

  • Personal lines of credit have higher limits than most credit cards, but the borrower's income is verified.
  • Personal lines of credit are not as easy to access.
  • Lenders use much more stringent underwriting for personal credit lines; they can be significantly harder to get than credit cards.
  • Personal lines of credit generally carry lower interest rates credit cards.
  • There is no grace period for purchases made with personal lines of credit. Interest accrues from the day a purchase is made.
  • A personal line of credit can have access fees, annual fees, late payment fees and others. It's important to read the terms and conditions.
  • Ideal for paying merchants who don't accept credit cards.
  • 100 percent of a limit can be withdrawn as cash, with no extra costs.

Break it Down

In general, credit cards are better for purchases, especially if you pay the balance in full each month. You don't accrue interest on purchases as long as you don't carry a balance, and you may be able to earn generous rewards. Credit cards with smaller credit limits might be better for those who spend on impulse a lot. Bigger limits can mean more trouble for people like that.

Personal lines of credit are better for those who require cash advances, because the interest and transaction costs are usually lower than those of credit cards. They are well-suited to provide cash flow for self-employed consumers or those with uneven income, like commissioned salespeople. Personal lines of credit allow borrowers to get 100 percent of their available credit in cash, while credit card issuers actively discourage taking cash advances – by limiting advances to about 20 percent of the available credit, by charging cash advance fees and by imposing a higher interest rate on cash transactions.

At the end of the day (if you are the disciplined sort who does not buy on impulse or overspend), it's probably ideal to have a credit card or two for convenience (and perhaps rewards) as well as a personal line of credit for those instances when only cash will do.

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