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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’s a key difference between a personal line of credit and a credit card: The former provides you with access to more cash for large purchases, though the credit line has a set draw period that only lasts a few years. With a credit card, your access to funds is more limited and costlier, but you could tap your credit line for many years.

Continue reading to learn more about how personal lines of credit and credit cards compare.

Personal line of credit vs. credit cards

Both personal lines of credit and credit cards allow you to borrow up to your credit limit as often as you need, and as you pay down your balance, you can borrow more money. 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 a rewards credit card. You should also expect your creditors to report your payments to the three major credit bureaus.

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. However, 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, meanwhile, can be open indefinitely, with issuers typically only closing inactive accounts. Credit cards also come with a grace period on interest; you can avoid interest charges on purchases by paying off your balance before this period ends. Rewards like cash back or miles make this product preferable for everyday use over a personal line of credit.

This table compares a personal line of credit versus a credit card:

Personal line of credit vs. credit card: Differences and similarities
Personal line of credit Credit card
Average APR 13% variable 14.58% variable
Credit limit $1,000 to $100,000 $300 to $50,000 or more
Unsecured or secured? Both Both
Draw period Yes, lasting a few years No
Grace period None At least three weeks
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 for an unsecured card
Common uses Major and ongoing expenses, such as home improvement projects Everyday expenses, such as groceries and gas

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 a 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 is 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 who provides your line of credit.
You can use a personal line of credit for such things as…

Debt consolidation

Home improvement projects

Major expenses like moving costs

Medical bills

Vacations or a wedding

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.

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 qualifies for a personal line of credit? 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 an asset like your home or car, which the lender can seize 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 to get a personal line of credit

1. Check your credit: You can typically see your credit score through your credit card issuer or free services like My LendingTree, 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.

2. Determine the borrowing limit you need: You may not know exactly how much you’ll need to borrow, but you should estimate the amount you’ll need at one time. Try to get a higher limit than the amount you’ll need to withdraw to keep your credit utilization ratio low.

3. Compare lenders: Every lender will weigh your information a little differently and provide a different rate and terms. Prequalify with a few lenders to see the terms you may qualify for and narrow down your search. Afterward, check each lender’s fee structures and read consumer reviews to help you select a lender to formally apply with.

4. Formally apply: Choose the lender that works best for you, based on the offered APR, limit and draw term. Next, apply for a line of credit online or in-person. At this point, you’ll need to provide documents like a photo ID, proof of income and proof of employment. The lender will also perform a hard credit check, which will cause a small, temporary dip in your credit score.
5. Withdraw only what you need: In as little as one day after approval, you could start withdrawing from your line of credit. Depending on the lender you choose, you may be able to access the funds by writing checks, using a special card or completing a bank account transfer.

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.

You can use a credit card for such things as…

Debt consolidation via balance transfers

Groceries

Gas

Household items

Apparel

Online shopping

Professional services

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.

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, a limit of $15,000 or less is more typical.
  • 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 18 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 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.

How to get a credit card

1. Check your credit: Just as with a personal line of credit, it’s important to check your credit score and credit reports to get an idea of what kind of card you could qualify for. As mentioned before, dispute any discrepancies you find on your credit reports.
2. Choose the right type of card: Based on your credit score, decide if you need a secured credit card to build credit first. If you have good credit, explore cards with introductory offers, rewards or other perks you might like.
3. Calculate your expected annual spending: This will tell you whether it’s worth it to pay an annual fee for a higher cash back value or other benefits. You should also determine which are your highest spending categories, since it’ll be worth it to find a card that has a good rewards rate for those categories.
4. Compare cards: Now that you have an idea of the type of rewards you want, compare other features across credit cards. For example, of the credit cards that offer high rewards on travel purchases, which ones also waive transaction fees and provide rental car insurance? There are a lot of credit cards to choose from, so you’ll need to narrow down your options to the cards that meet your needs.

5. Prequalify: Many credit card issuers have prequalification tools on their websites that you can use to check your eligibility for a particular card. This only requires a soft credit check, so it won’t hurt your credit. Pay attention to your estimated APR and credit limit.
6. Choose a card and apply: Now that you have a card picked out, go ahead and apply. Just know that a hard credit check will be required, which will cause a small and temporary dip in your credit score. It’s also possible you won’t be approved, even if you’ve prequalified.
7. Utilize your credit card: If your credit card comes with a sign-up bonus once you meet a spending threshold, put as many purchases as you can on that card to earn the bonus. Just don’t spend outside of your budget, and pay off your balance during the grace period to avoid unnecessary interest charges.

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. If you have inconsistent income as a contract worker or freelancer, you may not have a steady income. In that case, a personal line of credit can save you when bills are due but your cash isn’t in yet. 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 credit card or personal line of credit.

 

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