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Personal Line of Credit vs. Credit Card: How They Compare

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Personal lines of credit and credit cards both provide a convenient way to borrow money on an ongoing basis. As types of revolving credit, you’ll borrow against a credit limit rather than receiving a lump sum. But there are several key differences between these credit products that you should be aware of.

Here’s what you need to know about a personal line of credit versus a credit card:

Personal line of credit vs. credit card: How do they differ?

Both personal lines of credit and credit cards allow you to borrow up to your credit limit as often as you need, and you can borrow more money as you pay down your balance. You’ll typically need a good credit score to qualify for these products, especially if you’re applying for an unsecured personal line of credit or rewards credit card. You should also expect your creditors to report your payments to the three major credit bureaus.

However, while personal lines of credit and credit cards carry a lot of similarities as forms of credit, there are some pretty significant differences you’ll want to weigh as well:

  • Interest rates on personal lines of credit are generally lower than for credit cards. They also offer higher borrowing limits, making them ideal for high-cost, ongoing needs like home renovation projects.
  • Personal lines of credit have a set draw period that lasts a few years. After this period, you won’t be able to tap your personal line of credit and will need to pay back any outstanding balance within a set period of time.
  • Credit cards can be open indefinitely, with issuers typically only closing inactive accounts.
  • Credit cards also come with a grace period on interest, so you can avoid interest charges on purchases by paying off your balance before this period ends.
  • Rewards like cash back or miles make credit cards preferable for everyday use over a personal line of credit.
Personal line of credit vs. credit card: Differences and similarities
Personal line of credit Credit card
APR range 8.25% to 17.74% 8.99% to 29.99%
Credit limit $1,000 to $100,000 Up to $500,000 (typically $10,000 or less)
Unsecured or secured? Both Both
Draw period 6 months to 5 years No
Grace period None 21 to 25 days
Perks None Varies by card, but may include:

  • 0% introductory APR offer
  • Rewards like cash back, travel miles, etc.
  • Purchase protection
Fees Annual fees: $25 to $50

Late payment fee: $32 or about 7.5% of your past due payment

Returned payment fee: $25 to $39

Annual fee: $0 to $550 or more (for premium cards)

Balance transfer fee: The greater of 3% or $5

Transaction fee: 0% to 3%

Cash advance fee: The greater of 5% or $10

Late fee: The lesser of $35 or your total balance

Credit score requirement 690 or higher for an unsecured line of credit 650 or higher (typically) for an unsecured card
Common uses Major and ongoing expenses, such as home improvement projects Everyday expenses, such as groceries and gas

What is a personal line of credit?

How does a personal line of credit work?

A personal line of credit is a revolving credit line from a bank, credit union or another issuer. You can borrow as much as you want at once — up to an agreed-upon limit — at any time, and interest is only charged on the amount you borrow. Purchases can be made by writing checks or by using a special card. There’s no grace period on a personal line of credit, so interest is charged on all purchases.

If you need cash, you can make a withdrawal with a bank account transaction or wire transfer without paying a fee on top of interest charges. Your options will depend on the institution that provides your line of credit.

Unlike with a credit card, personal lines of credit come with a predetermined draw period, wherein you can freely make purchases and make payments on your balance. Draw periods typically last a few years, but may vary among lenders. If you have an outstanding balance after your draw period ends, you’ll need to pay it off during a set repayment period.

Common uses for a personal line of credit

How does a personal line of credit impact your credit score?

Like most forms of credit, a personal line of credit can have an impact on your credit score. Since your lender most likely reports your repayments to the three credit bureaus, making your payments for a personal line of credit on time can help improve your score. Likewise, if you don’t pay back the line of credit, your lender can report this as well — which may, in turn, have a negative impact on your credit score.

Your credit also may be impacted when your lender does a hard credit inquiry on your credit profile. Once you’ve turned in your application, lenders typically need to do this in order to provide final approval. Hard credit pulls can have a negative effect on your credit score, so make sure your credit is in a place where it can stand the impact.

You can typically see your credit score through your credit card issuer, another free service or your LendingTree account, which allows you to monitor your credit and compare loans and lines of credit. If your score is low, review your credit reports from the major credit bureaus at AnnualCreditReport.com — you can dispute errors to potentially increase your credit score.

Personal line of credit: Pros and cons
Pros Cons
  • High credit limits: You may be able to access as much as $100,000 with a line of credit.
  • Low APRs: Personal lines of credit typically come with lower interest rates than credit cards.
  • Cheaper cash withdrawals: While credit card issuers charge hefty cash advance fees, you can withdraw cash from a line of credit at any time and only pay interest on the amount borrowed.
  • No grace period: Since there’s no grace period, you’ll pay interest charges every time you borrow.
  • Draw period: You’ll only be able to use your line of credit for a set period of time.
  • No rewards: If you use a rewards credit card instead, you can earn cash back or other perks on purchases.
  • Annual fees: Depending on the lender, you may have to pay an annual maintenance fee.

Who is a personal line of credit best for?

Personal lines of credit are typically unsecured, meaning you don’t need collateral to qualify. However, your credit score and income will be weighed heavily when you apply and can impact your interest rate and credit limit. Although lender requirements vary, you’ll generally need a credit score of 690 or higher to be eligible.

If your credit is less than perfect, consider a secured personal line of credit, which may allow you to qualify for lower rates or better terms. These are backed by assets like your home or car, though the lender can seize your assets if you don’t keep up with payments. Since lenders have recourse when you default on a secured line of credit, the risk of extending credit to you is reduced, which allows the lender to offer a lower rate or accept a less creditworthy customer.

How does a credit card work?

A credit card is also a revolving line of credit that has a credit limit. You can get a credit card from a bank, credit union or another credit card issuer, and you’ll be able to use that card to make purchases at most retailers across the country. Credit cards offer a grace period of at least 21 days, but if you don’t pay back your balance in full during this time, interest will be charged on your remaining balance.

Your interest rate depends on your creditworthiness — the higher your credit score, the lower your rate. Your credit score will also affect your credit limit.

Your credit card terms and rates vary depending on your agreement and any special offers you qualify for. For example, if you receive a 0% introductory APR offer, you won’t be charged interest on purchases you make during a set period of time. Any balance you have after the offer expires will be charged interest, however.

Common uses for a credit card

  • Professional services

How does a credit card impact your credit score?

Credit cards can impact your credit similarly to how a line of credit could. After you’ve applied for a credit card, the lender will have to do a hard credit pull to give you final approval for access to the card. A hard credit pull can put a ding in your credit, so you may want to make sure your credit is in a good place before applying for a credit card.

Like a personal line of credit, your credit card company may also report your payments to the three credit bureaus. If you pay off your credit card on time, this will reflect positively on your credit score. Conversely, if you have late payments or stop making your credit card payments all together, your credit score may be negatively impacted.

Credit card: Pros and cons
Pros Cons
  • Rewards: Everyday purchases on a rewards credit card can earn you cash back, points or travel miles.
  • Other perks: Many credit cards come with additional benefits like purchase protection and rental car insurance. Some premium cards even come with access to airport lounges.
  • Grace period: It’s possible to use your card regularly without ever paying a cent in interest due to the grace period.
  • Higher interest rates: APRs are typically higher for credit cards than those of personal lines of credit.
  • Lower limits: While some premium cards for creditworthy customers offer limits higher than $50,000, as of 2020, the national average credit card limit is $30,365.
  • Costly cash advance fees: If you need to access cash, you’ll likely pay a fee and a higher APR on the amount borrowed.

Who qualifies for a credit card?

Your eligibility for a credit card will depend on the APR and the benefits it offers. For example, rewards credit cards typically require good or better credit. Similarly, credit card issuers try to lure in strong-credit borrowers with offers like a low introductory APR that generally lasts up to 21 months. In general, however, you can find credit cards for nearly any credit score.Store credit cards typically come with small credit limits and can be easy to qualify for. However, they often come with high APRs and deferred interest on special financing offers. With these types of offers, you won’t be charged interest if you pay off your card balance during the special financing period; if, however, you don’t pay off your balance in full, you’ll be charged interest from the purchase date.

Secured credit cards, meanwhile, are a great option for building or repairing credit. With this type of product, you’ll put down a security deposit — generally, a few hundred dollars — and the lender will issue a credit line based on that amount. You’ll use your card as normal, with the lender reporting your payments to credit bureaus. If you fall behind on payments, the card issuer will use your deposit to cover costs.

What are alternatives to credit?

  • Personal loan: Unlike a personal line of credit or credit card, with a personal loan, you’ll receive a lump sum of money from a lender. APR rates, terms, loan amounts and fees will vary lender to lender, but will also be based on your creditworthiness. This is especially the case if you apply for an unsecured personal loan rather than a secured personal loan where you’d need to provide a lender collateral. Personal loan amounts typically range from $1,000 to $40,000.
  • Peer-to-peer loan: Unlike the traditional approach to lending where you apply for a loan through a bank, credit union or online lender, peer-to-peer lending (P2P) allows you to borrow from individuals on an online platform. The online platform matches you with an individual who may be willing to provide you with a loan. This type of approach may be best suited for those who have trouble securing a loan through traditional means.
  • Build up your savings: If you find yourself in short supply of cash, you can implement a budget plan to pay off debt and keep up with your bills. If you’re thinking about making a big purchase, consider saving up for it rather than financing it. While you may have to wait a little longer before you receive your purchase, it may save you money in the long run by avoiding interest and expensive fees.
  • Ask for a payment plan: If you find yourself in an emergency situation — such as being unable to pay your utilities or finding yourself with unexpected medical expenses — some organizations will work with you and come up with a payment that may be more affordable for you. Some organizations may even slash your total bill down or offer you other means of financial assistance if you’re struggling to repay.

The bottom line: Which one is right for you?

If you need a convenient way to purchase your everyday essentials, a credit card will be your best bet. That’s because you won’t have to pay interest on those purchases as long as you can pay your balance in full every month. And when you consider the rewards you’ll rack up, using a credit card could actually save you money.

A personal line of credit may be best if you need to consolidate debt or avoid falling behind on bills. A personal line of credit can also be helpful for ongoing projects, such as home improvement or wedding planning, especially if you’ll need to borrow repeatedly and aren’t sure how much you’ll need.

Regardless of which one you choose, make sure to review lenders, terms and agreements before signing up for a personal line of credit versus a credit card.

 

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