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Line of Credit vs Credit Card: What’s the Difference?
Here are the key differences between a line of credit vs credit card? A credit card and a line of credit are both types of revolving credit. You’ll be accepted for a loan up to a specific amount with both, but you won’t have to borrow any money right now.
You have complete control over when and how much you borrow, up to the account limit.
You simply pay interest on the amount you borrow, and as long as you don’t over your credit limit, you can borrow as much as you like.
However, there are some key distinctions between a credit line and a credit card. Here’s everything you need to know about credit cards vs. lines of credit.
One of the most significant distinctions between the two is that, while a credit card is linked to and allows you to access a line of credit, it is possible to open a line of credit without a card.
Credit cards are basically lines of credit, however not all lines of credit are credit cards.
Terms and Conditions of Credit
The APR on a line of credit is frequently lower than the APR on credit cards, though terms vary by lender.
A line of credit’s credit limit may be higher than that of a credit card. Credit lines may be better suited to significant purchases that you plan to pay off over time because of these benefits.
Access and rewards
Credit cards are a convenient way to make routine purchases. They frequently provide a grace period during which you can avoid paying interest, which is not possible with lines of credit.
Many credit cards, unlike credit lines, give cash back or other rewards for spending.
Application requirements
When applying for a credit card, you must submit accurate financial information, whereas applying for a line of credit without a credit card often requires proof of income.
This makes applying for a credit line a little more difficult and time-consuming.
What is a Line of Credit?
A line of credit is a type of loan that permits you to borrow money over and over again.
You can borrow up to a particular amount and then repay your debt. You can continue to use the line of credit as long as your balance does not exceed your credit limit.
You will be charged interest on the money you borrow, as well as a fee each time you use a credit line.
How Does a Line of Credit Work?
To utilize your line of credit, your issuer provides you with checks to write. You can also request a transfer in person, over the phone, or on your bank’s website to have money put into your account.
You may also be able to set up automatic withdrawals from your credit line to cover overdrafts on your checking account with your bank or credit union.
Secured and unsecured credit lines are available. Home equity lines of credit, for example, are backed by your home.
They normally have variable interest rates; however, some banks will give a fixed rate on some or all of your balance.
They frequently have a draw term, during which you can borrow money. After the draw period, you may be expected to pay the entire amount owed immediately away, or you may be allowed a payment window.
A personal line of credit is not backed by collateral. You may be required to have an existing checking account with the bank or credit union supplying the credit line in order to be authorized.
You’ll get a charge every month after you borrow, and you’ll have to pay at least the minimum monthly amount. Interest rates can rise or fall in response to market conditions.
Does a Line of Credit Affect Your Credit Score?
Opening a new line of credit can have a positive or negative impact on your credit score, as can how you manage that credit in the future. A line of credit has the following impact on your credit score:
➣ New inquiry: When you apply for a line of credit, the lender initiates a hard inquiry on your credit history.
This inquiry will be on your credit report for two years and can have a 12-month impact on your FICO score.
➣ Credit history length: Adding a new credit line reduces the average age of your accounts.
This can damage your credit score, especially if you don’t have much of a credit history.
➣ Credit mix: When you start a credit line, you’re adding a revolving credit account to your credit history, which might help you enhance your credit mix if you haven’t had any before.
Having a diverse set of accounts under your name can help you improve your credit score.
➣ Credit utilization ratio: Utilizing a personal line of credit affects your credit utilization ratio, which is the amount of revolving credit you’re using divided by your credit limit.
While FICO does not consider how much you’ve borrowed through a HELOC when calculating your credit usage ratio, it does consider HELOCs when calculating the amount, you owe.
Your credit score can be lowered if you have a lot of debt from a HELOC or other accounts.
➣ Payment history: Making on-time monthly payments on your line of credit develops your payment history and can help you boost your credit score; however missing or late payments will likely lower your score.
When Should You Use a Personal Line of Credit?
When you need to make a major purchase, pay for unexpected expenses, or can’t foresee the precise dollar amount you’ll need to borrow up front, a personal line of credit can help.
For example, if you have out-of-pocket payments for continuing medical treatments but aren’t sure how many bills you’ll receive or how much they’ll cost, you can use this method.
When it comes to carrying a higher load that you need to pay off over time, a personal line of credit allows you more flexibility than a one-time personal loan, and the conditions may be more advantageous than a credit card.
What is a Credit Card?
A credit card is a method of payment that allows you to make everyday purchases online, over the phone, or in person using a credit line.
Charging payments to the card by physically swiping or inserting it into a terminal or entering the card’s number, expiry date, and security code into an online payment form raises the account balance and lowers the available credit by the amount of the purchase.
How Does a Credit Card Work?
At the end of each billing period, cardholders receive a statement. Many credit cards offer a grace period during which you will not be charged interest if you pay off your entire balance by the due date.
If the cardholder does not pay the entire balance, the grace period ends, and the balance begins to accrue interest. They also owe interest on new purchases immediately soon.
Cardholders must make a minimum payment by the due date each billing cycle, or they may be charged late penalties and may be liable to a penalty APR.
Some credit cards give rewards for using the card to make purchases. You may receive cash back, points, or miles on purchases, depending on the type of card, which you can redeem for statement credits, airline miles, gift cards, and more.
What Impact Does a Credit Card Have on Your Credit Score?
A credit card account, like a line of credit, can have an impact on your credit score.
➣ New inquiry: When you apply for a new credit card, your credit report receives a hard inquiry, which might temporarily reduce your score.
➣ Credit history length: Opening a new account shortens the average age of your accounts, lowering your score.
➣ Credit mix: Getting a new credit card provides you a revolving account, just as getting a line of credit.
If you didn’t have any revolving credit before, this will enhance your credit mix and perhaps raise your score.
➣ Amounts owed: Using a credit card to make purchases increases your credit utilization ratio.
A high credit usage ratio can give the impression that you’re about to exhaust all of your available credit, which will lower your score.
To maintain a healthy credit score, it’s usually recommended that you keep your credit utilization ratio around 30%.
➣ Payment history: Making on-time payments on your credit card bill each billing cycle adds to your payment history and can help you improve your credit score.
Paying your payment in full has no effect on your credit score. In truth, credit card companies submit your monthly statement balance to the credit agencies, thus leaving a balance on your card has no effect on what was reported for that month.
When Is It Appropriate to Use a Credit Card?
Credit cards are essential when you don’t want to carry cash but yet need to make a payment.
When you can pay your credit card account in full each month, using a credit card for everyday purchases makes sense.
You will avoid paying interest and will not accumulate credit card debt that you cannot afford to repay.
Using rewards credit cards is a great way to get paid for your purchases, especially when you can earn a lot of money in categories where you already spend money, such as groceries, dining, or gas.
If you’re planning a significant purchase, look for a card with a 0% introductory APR so you can pay off the debt over time without paying interest.
Credit cards, unlike certain other payment options, such as debit cards, offer more protection against fraud.
Many credit card companies offer cardholders zero liability for fraud. A credit card is often a good choice if you’re concerned about security, such as when traveling or shopping online.
Credit Alternatives
If you’ve examined a credit card or a personal line of credit but found that neither is a good fit, it’s time to look into other options.
➣ Work on saving: Rather of financing a large purchase, one option is to save up for it.
The disadvantage is that you must wait till you have enough money to purchase the item. You don’t have to pay interest, which is a positive.
➣ Look for community resources: See if your neighborhood has a freecycle or mutual help group. These associations occasionally sell used furniture or appliances that other members of the group no longer require.
➣ Rent what you need: If you can’t afford to buy something you’ll only need for a short period, consider renting it. Rentable items include everything from sports equipment to home improvement tools to wedding gowns and textbooks.
➣ Request a payment plan with direct debit: You could seek assistance if you require funds for necessities such as utility payments or medical care.
People who are unable to pay full price are frequently given financial aid by utility companies and hospitals.
They may be able to give you a payment plan with better conditions than a credit card company or a bank if you don’t qualify for a discount.