Personal Loans

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

when to avoid reward credit cards

Borrowing money comes in many different forms. If you’re stressing out about where to get money, you have more options than you think, including credit cards and a personal line of credit.

While both have their similarities, a personal line of credit and credit cards are not the same. The one that makes more sense for you depends on your personal financial situation.

A credit card is great for quick purchases. A personal line of credit is nice to have if you need to borrow money over the course of a few weeks or months for various necessities. Looking to buy a new TV? A credit card is fine. If you need to pay rent and your income is irregular right now, a personal line of credit may work better.

What is a personal line of credit?

A personal line of credit is a revolving credit line that allows you to borrow money and pay it back on a consistent basis. You’re borrowing money that a bank, credit union or other issuer has agreed to lend you. You can borrow as much as you want at once — up to the agreed-upon limit — anytime. You pay interest on the amount you borrow at the time, not on the maximum amount for which you’re approved.

Withdrawals can come from a physical bank account transaction or a wire transfer, depending on where you take out your personal line of credit.

A home equity line of credit (HELOC) is similar, but your home is used to secure the line of credit. A personal line of credit is usually unsecured, which means the major thing that qualifies you is your credit score. The higher your credit score, the more likely you are to be approved for the line of credit, as well as a lower interest rate. Income is also required to get a personal line of credit.

Separately, a personal loan isn’t the same as a personal line of credit. While the maximum amount you can borrow is approved with a personal line of credit, you take out what you need when you need it. A personal loan gives you a lump sum of money that you pay back in installments over time per your loan terms, ranging from months to years.

What is a credit card?

A credit card is also a revolving line of credit that has a maximum amount you can charge. You’ll get a card that you can use to make purchases. You can get a credit card from a bank, credit union or other credit card issuer.

Repayment terms for credit cards allow a grace period of at least 21 days. If you don’t pay back your balance — or the amount you charged — in full, interest on your balance could be added. But your credit card terms and rates vary depending on your agreement.

Your interest rate depends on your creditworthiness. The higher your credit score, the lower your interest rate. Your credit score may also determine your credit limit. If you have a higher credit score, you may qualify for a higher limit.

How a personal line of credit and a credit card are the same

It’s easy to get personal lines of credit and credit cards mixed up since they have a lot in common. Here are some of the key ways these two versions of credit are the same:

  • They are revolving credit lines, allowing you to borrow as needed.
  • They can offer both fixed and variable interest rates.
  • They report to credit bureaus, showing up on your credit report and influencing your credit score.
  • They use your credit score to determine eligibility.
  • They have spending limits.

Differences between a personal line of credit and a credit card

While both of these credit uses are alike, they have some major differences. Because of this, you’ll want to review both of them carefully before deciding which one is right for you.

  • Proven income requirement: While both require credit checks, a personal line of credit may also request extra documentation to prove your creditworthiness. A steady income with a solid job secures your chances of getting a personal line of credit.
  • Credit limits: Personal lines of credit can give you hefty limits — usually higher than credit card limits. Personal line of credit limits can get to upward of $100,000, depending on the lender you choose.
  • Interest rates: Because a personal line of credit verifies your creditworthiness through your credit score and income, interest rates tend to be lower for this. But it also varies on the lender you choose and your credit history.
  • Grace period: A personal line of credit doesn’t have a grace period, while credit cards have one lasting at least three weeks.
  • Rewards programs: Credit cards can have lucrative incentives and rewards for usage, depending on your issuer. A personal line of credit doesn’t offer rewards.
  • Cash advances: Credit cards come with fees if you want to take out a cash advance. With a personal line of credit, you get your money and only pay interest on that — there is no cash advance fee. And you can take out the full amount you want, while credit cards may have a restriction on how much cash you can take out.
  • Setoffs: This is where your lender can take out money from your checking or another banking account to pay off a personal line of credit. Credit cards don’t allow setoffs.
Personal Line of Credit vs. Credit Card
Personal Line of Credit Credit Card
Prove income Yes No
Type of interest rate Variable or fixed Variable or fixed
Type of account Revolving line of credit Revolving line of credit
Rewards No Yes
Minimum monthly payment Required Required
Type of credit Unsecured line Unsecured line
Good for major expenses Yes No
Good for debt consolidation Yes No

Which one is right for you?

Choosing between a credit card and a personal line of credit may seem confusing since the two are similar. But don’t be afraid to dig deeper to find the one that’s right for your personal needs.

If you’re buying something relatively low-cost or are looking to earn rewards or points, a credit card is enough. As long as you can pay your balance in full every month or plan to pay off your card before interest starts to add up, you may want to try a credit card.

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 paycheck. In that case, a personal line of credit can save you when bills are due but your cash isn’t in yet.

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.

This article contains links to ValuePenguin, which is owned by LendingTree.

 

Get personal loan offers from up to 5 lenders in minutes