Personal Line of Credit vs. Credit Card – Understanding the Difference
For most people, there will most likely come a time in life when you need fast access to credit. And, in those situations, a revolving credit line like a personal line of credit or a credit card may prove useful. Although the products operate similarly, they have different advantages and drawbacks.
Here’s an easy-to-read, general comparison of personal lines of credit and credit cards. Once you’re done reading the table, we get into how each product functions and the factors to consider when weighing both options.
|Comparing the Two|
|Personal line of credit||Credit card|
|Type of Account||A revolving credit line||A revolving credit line|
|Where to find||Banks, credit unions and online lenders||Banks, credit unions and credit card issuers|
|Collateral||May be secured or unsecured||May be secured or unsecured|
|Interest rate||Variable or fixed rate
Rates vary. As low as about 4% for secured lines to above 20% on unsecured lines
|Variable rate. The average credit card purchase rate is 15.5% APR.
Different rates may apply to balance transfers, cash advances and purchase.
|Potential Fees||● Annual fee
● Late payment fee
● Cash advance or draw fee
● Origination fee
● Closing costs (HELOCs)
|● Annual fee
● Late payment fee
● Cash advance fee
● Balance transfer fee
● Foreign transaction fee
What is a revolving credit account?
Revolving accounts like a personal line of credit and a credit card allow you to borrow against credit, repay the balance and borrow again without applying for new credit. They also allow repayment in small monthly payments. Because of the flexibility a revolving line offers, the repayment period can vary greatly, as it heavily depends on how much you use, the amount of interest you incur and the how much more than the minimum payment you make each month. Installment loans, on the other hand, require fixed payments over a fixed term, making them more predictable than revolving accounts.
What is a personal line of credit?
A personal line of credit gives you the ability to borrow money on demand, up to the credit limit.
You may have the option to make a withdrawal, also called a draw, against the line of credit using a card, bank transfer or a check linked to the account. The withdrawal options you have depend on the account.
The lender will require you pay interest on the draws made against the line of credit. You may be charged a fee per draw, and interest may accrue immediately after you make the withdrawal. Your lender may charge an origination fee to open the line of credit and also charge an annual fee to keep it open. Overall, the fees you pay will depend on the account you have.
The revolving line of credit may have an unlimited term, like a credit card. In those cases, the lender would likely require a monthly payment to repay what you draw from the loan, with interest. As an alternative line of credit structure, the lender may limit and split its term into a draw period — a duration of several years during which you can make withdrawals from the credit line — and a repayment period. During the draw period, you can make draws against your total credit limit, but your lender may require you to make minimum monthly payments on what you’ve borrowed. Paying more than the minimum could limit how much interest accrues on the draw.
During the repayment period, the lender may prohibit you from making draws and will require you to make periodic payments to repay the principal and interest charged.
A personal line of credit may be secured or unsecured. If the loan is secured and you are unable to repay the loan, the lender may seize the collateral, which in the case of a personal line of credit may be the funds in your deposit account or an investment account.
Borrowers are generally offered unsecured credit lines based on their creditworthiness. The lender may also consider factors such as income, debt-to-income ratio or an established relationship with the bank, credit union or lender. You may be able to secure the credit line with an asset, to reduce risk to the lender and qualify for more favorable terms.
What is a credit card?
A credit card grants access to a revolving credit line up to a credit limit established by the lender. Once you reach the credit limit, your lender declines further transactions.
The amount of the credit line you’ve used up is called the card balance. When you use the credit account to make purchases, balance transfers or cash advances, the balance increases. Your balance will also increase if your issuer charges you interest or fees. When you make payments toward the account, the balance falls.
The credit card will have a billing period that usually lasts about 30 days. When the billing period ends, your credit card issuer issues a credit card statement, which summarizes your transactions, informs you of your current balance and required minimum monthly payment and also details any fees or interest charged during the billing period. The minimum payment may not be due for another 21 to 25 days. All transactions made after the end of the billing period will show on the statement for the next billing period.
The billing period may also serve as a grace period. If you pay off the entire statement balance before the grace period ends, your credit card issuer may not charge interest on purchases made during the statement period.
However, you can pay less than the statement balance and carry a balance into the next billing period. If you carry a balance, the creditor will charge interest on purchases made during the billing period. The charge will show up on the next billing statement. If you don’t make at least the minimum payment, you may be charged a late fee and your interest rate may rise to a higher, penalty interest rate.
5 key differences between a personal line of credit and credit card
1. Common eligibility requirements
Personal line of credit
- Your income must be verified
- The lender may require you already have had an established relationship with them for a period of time.
- Credit score requirements vary by card
- For unsecured cards, you generally must have at least a good credit score
- For secured cards, you may qualify with no credit, bad credit or better
2. Interest grace period
Personal line of credit
- No grace period; interest may accrue from the day you make a purchase or draw
- About 21 to 25 days for most accounts; varies based on the account
- Cards with introductory promotional offers may have an extended grace period on purchases and/or balance transfers
A personal line of credit does not offer rewards. A credit card may offer a promotional sign-on bonus, airline miles, early access or discounts to ticketed or cardholder-exclusive events, points or cash back to be used on limited rewards options including flights and gift cards.
Personal line of credit
- Creditors may determine your credit limit based on several factors, including:
- Collateral (secured line)
- Debt-to-income ratio
- The credit limit is generally higher than what is offered on a credit card
- Secured credit line limits are based on collateral. There are some with million dollar limits. Unsecured lines could be hundreds of thousands
- The lender may allow you to request a credit limit increase at any time
- For secured cards, lenders determine the credit limit based on collateral and creditworthiness.
- For unsecured credit cards, the credit limit is determined based on creditworthiness and income
- Credit limit generally is not as high as what is offered on a personal line of credit
- You may request a credit line increase or lender may conduct periodic reviews to determine whether or not to increase your credit limit
5. Purchases and drawing cash
Personal line of credit
- You can withdraw total credit limit in cash at once
- You may make draws with a card, transfer or checks, depending on what your lender offers
- The lender may charge a fee per draw
- The lender may have a minimum draw amount (e.g., $500)
- No minimum on purchases
- Generally, the lender will limit cash advances to 20% of the total credit line
- The lender may charge a cash advance fee
- No purchase fee
Deciding which is better for your situation
Deciding between the personal line of credit and credit card will depend heavily on both your financial situation and how you intend to use the revolving credit line.
A personal line of credit is best if you need immediate access to credit and/or on occasion for a specific period of time. A line of credit may be useful if, for example, you are making periodic payments for contracted work, or if you are a contractor and may need credit to fill in for inconsistent income to cover your bills.
A credit card is best if you intend to use the credit line to cover everyday purchases and have the discipline to maintain a low balance, make payments on time and, ideally, pay off the balance each month. It can also be useful to those who want credit card rewards, may benefit from a promotional offer or want to consolidate debt with a card offering a 0% introducory APR on balance transfers. You may also elect a credit card for safer online shopping, as it’s not directly connected to a bank account.
Both options could come in handy in an emergency, though the interest charges could make them more expensive than using cash savings, personal loans or home equity loans or home equity lines of credit.
Beyond your intended use, a personal line of credit may be more difficult to qualify for than a credit card because lenders generally have stricter underwriting requirements for personal credit lines. If you are concerned about getting approved for a personal line of credit because you have a fair or bad credit score, won’t pass the income verification or have a high debt-to-income ratio, you may opt to try an unsecured or secured credit card instead.