Line of Credit vs Credit Card, What's The Difference?
Published on March 26th, 2019 by CreditFresh
These days, it can sometimes feel like there are too many options when you’re in need of financial help. Between credit cards, lines of credit, personal loans, home-equity loans, secured and unsecured loans, it can be a bit overwhelming.
So, what is the difference between each of these products? And which one is right for you? You don’t want to choose the wrong one and get locked into something you don’t really need, with an interest rate higher than it should be.
Today we’re going to focus on the difference between a line of credit and a credit card. Either of these options may be right for your situation. However, because everyone’s financial situation is unique, there is no such thing as a one-size-fits-all solution.
But, we hope to give you enough information to make an informed decision about what’s best for you.
The Similarities: Line of Credit vs. Credit Card
Are these two things the same thing? They pretty much have the same name, right? Not exactly. However, there are some similarities.
Both a line of credit and a credit card are examples of revolving credit. Generally, with revolving credit you have a credit limit – let’s say, $2000, which you have access to. However, you are under no obligation to use all of it. If you only need $800 for now, that’s fine, you will only be charged based on what you use. You are also free to borrow and pay back on an ongoing basis. For example, you can use $1000, then pay back $900, then use another $200, then pay back $300, and so on. Hence the term revolving credit.
This is different than a personal loan, which gives you a lump sum of money. With a personal loan, if you borrow $2000, you’re given the entire $2000, and interest accrues on the entire amount immediately. Because a loan is not a revolving credit product, you cannot withdraw from it again, even if you have paid most of it back. You would have to completely pay off the balance and take out a brand new loan if you wanted to borrow again.
The Differences: Line of Credit vs Credit Card
Now that we have explored the similarities, let’s see how these two things are different.
A line of credit is usually offered by a bank, a private lender, or an online service like CreditFresh by CBW Bank.
Credit cards, on the other hand, are typically offered by major credit card companies. Now, these may come in a few different forms. Major credit cards often partner with major banks or department stores.
You might have been approached for a Walmart Mastercard or a Capital One Costco Mastercard.
How Does Credit Card Interest Work?
Credit card interest centers around your annual percentage rate (APR). Your card may have a fixed APR or a variable APR. A fixed APR typically stays the same, but it may change if your payment is over 60 days late or if an introductory offer expires. A variable APR shifts with the prime rate.
Your card may also charge you:
- Purchase APR
- Balance transfer APR
- Cash advance APR
- Introductory APR
- Penalty APR
What About Perks?
Another difference is credit cards will often offer you perks for using the card. This could include cashback, where you receive a small percentage of money back on every purchase you make using this credit card.
Or, it could be reward miles such as Air Miles, which can be put towards flights, vacations, or hotel rooms. These offers aren’t available when using a revolving line of credit.
Why Would I Need a Line of Credit?
One of the bigger differences between these two forms of revolving credit is how you could use them.
A line of credit may be a good idea if you know you are going to be short of money in the near future. This might be because you have unpredictable income, or maybe you are self-employed or work on commission.
A line of credit may give you the opportunity to keep on top of your bill payments and life’s unexpected expenses.
Taking out a loan in this situation may not be ideal, because you’re not quite sure how much you will need or when you will need it. So, why pay interest on funds that you may not need? With a line of credit, you are only paying for what you use.
A line of credit can also act as a safety net. Life’s expenses can come from out of nowhere. You don’t know when your car is going to break down, your washing machine is going to quit, or your roof is going to start leaking. A line of credit may be a good safety net for when these expenses do show up from out of nowhere.
Why Would I Need a Credit Card?
A credit card could be the solution for any of the situations listed above. However, if you need the money in a hurry, the application process for a major credit card may take a few weeks.
The best use case for a credit card may be for somebody who travels a lot. Major credit cards are accepted all over the place, and the rewards or perks may be very appealing. Also, a credit card can act as a form of identity when renting a vehicle or a hotel room.
You will actually have a very difficult time renting either of those things without a major credit card. Some hotels will still rent you a room with no credit card for a cash deposit or other arrangements. Some car rental agencies will accept a major (Visa, MasterCard, or Discovery) debit card in lieu of a credit card, but the majority do not. In either case, it is simply much easier to travel using a credit card.
How Do I Apply For a Line of Credit?
There are different processes for different types of lines of credit. For example, if you choose to go through the bank, the bank will assess your overall financial situation using their own proprietary formula. No two banks use the exact same formula, but they are all based on a similar set of variables.
They will likely assess criteria such as your income, your credit history, any assets you may own, and your employment history. They’re trying to gauge how much of a lending-risk you are. A line of credit at a bank can be tricky to get if you have damaged credit or no credit. You may even be asked to put up an asset as collateral. That’s the secure line of credit we discussed earlier.
Applying Online for a Line of Credit
Another option could be applying online for something like a CreditFresh Line of Credit. This process can be much faster and done in a matter of minutes. You answer a few questions about yourself, and you won’t be asked to put up a vehicle, a home, or any other form of collateral.
You may have your offer in minutes, and the funds may be drawn into your bank account as soon as the next business day.
Here’s how it works:
Step 1: Check Your Eligibility
Answer a few questions online in a few quick minutes. There is nothing to lose and no negative impact on your credit score.
Step 2: Accept Your Offer
If eligible, simply choose your credit limit, securely verify your details, and review and sign your agreement.
Step 3: Get Your Funds
The money may be deposited into your bank account as soon as the next business day.
This process may be a good route to go if you’re in a bind and need money quickly, without an intrusive hit on your credit report. The bank is most likely going to run a “hard check” on your credit, whereas CreditFresh may perform a “soft check” on your credit, which doesn’t affect your credit rating.
Hard Check vs. Soft Check
Hard inquiries are when a company or agency checks your credit to make a lending decision. It is recorded on your report and may lower your credit score. Multiple hard checks in a short period of time will look bad, as it may tell lenders you’re financially unstable. This is why you need to authorize it.
By contrast, the soft check does not lower your score, and in most cases, it’s not recorded. Unlike a hard check, you do not need to authorize them, and they may be done by a would-be employer, or your credit card company before they offer you a promotion.
How Do I Apply For a Credit Card?
In this day and age, it’s actually very likely that a credit card will come to you. You are probably bombarded with credit card offers in the mail and through online ads all over social media. The problem with this is these ads can promise you X and Y, with all these great rewards and perks. But if you read the fine print, like anything, this is subject to approval. Just because you’re sent a fake card in the mail, does not mean you qualify for a real one.
The people who sent it to you have no idea what your credit score/history looks like, so in reality, they’re asking you to apply – not offering you a card.
In any case, the process is fairly similar across the board, whether you’re applying online, over the phone, or with somebody at a department store. They will run a “hard check” on your credit, which again, might hurt your credit rating. They will also assess your credit history and your employment situation when coming to a decision.
If you qualify, they will send you a card in the mail and that could take several weeks. Unfortunately, if you don’t qualify, you get nothing except for a slight ding on your credit rating because of the hard inquiry they did during the application process. This can feel like a bit of a slap in the face.
Again, this process can take a few weeks. So, if you’re in need of immediate help, your best option may be to apply for a line of credit online.
How to Build Credit Without a Credit Card
One key area where the line of credit and credit card are similar is their usefulness in building your credit.
Let’s take a look at both:
A Credit Card to Build Credit
Using a major credit card to build your credit may not be an option, simply because you may not qualify for a major credit card if you have damaged credit. In that case, you may opt for what is called a secured credit card. These are still offered by all the major credit card companies and act like most credit cards
The key difference is you are paying a certain amount of money to secure the card. This could be any value all the way up to the credit limit, and that money acts as your available credit.
A Line of Credit to Build Credit
If you are turned away by the bank to get a line of credit, you still have choices. The CreditFresh Line of Credit may be a good option for you. You can use the line of credit by putting your bill payments on the line of credit to build a favorable credit history, because CreditFresh will report your payments to credit bureaus.
As mentioned above, this strategy only works if you are keeping a low balance and making your payments on time. Of course, you need to be doing the right things everywhere else, such as paying all of your other bills on time and not racking up debt elsewhere.
Take Your First Step Towards a Line of Credit Right Now
A CreditFresh Line of Credit may act as a safety net. The process is simple, quick, and transparent, with clear terms and no unexpected or hidden fees. You may receive a personal line of credit from $500 - $2,500. Submitting an application will not negatively impact your credit report, and you can click here to get started.