Line of Credit or Credit Card, What's The Difference?

Published on March 26th, 2019 by CreditFresh

A graphic image of people shopping on their mobile devices with Credit Cards

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, other types of personal loans, home-equity loans, secured and unsecured loans, it may 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 product and end up with something you don’t really need, so it’s important to make an informed choice.

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 depending on your needs. 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, $2,500, 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 may use $1,000, then pay back $900, then use another $200, then pay back $300, and so on. Hence the term revolving credit.

This is different than some other kinds personal loans, which give you a lump sum of money. With a personal loan, if you borrow $2,500, you’re given the entire $2,500, and interest accrues on the entire amount.

Because loans like installment loans are not a revolving credit products, you typically undergo a separate borrowing process each time you require a new loan. This means that you would have to completely pay off the outstanding balance and take out a brand-new loan if you wanted to borrow again.

The Differences: Line of Credit vs Credit Card

Woman checking her credit card statement

Now that we’ve 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.

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 noticed a Walmart Mastercard or a Capital One Costco Mastercard.

How Does Credit Card Interest Work?

Your annual percentage rate (APR) plays a big role in how much interest your charged on your credit card. 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 the following types of interest:

  • 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 a card. This may include cashback, which is when you receive a small percentage of money back on every purchase you make using a credit card.

Or, it could be reward miles, which may be used 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 which you draw funds from typically acts as a safety net. Life’s expenses aren’t always predictable. 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 emergency expenses show up from out of nowhere.

A line of credit may also be a good idea if you know you’re going to be short of money in an emergency in the near future. This might be because you have unpredictable income, or maybe you are self-employed or work on commission.

Taking out a different kind of personal loan like an installment 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.

Credit and debit card machine

Why Might I Need a Credit Card?

A credit card may be the solution for any of the situations listed above. Or you may rely on a credit card for everyday expenses. However, if you need the money in a hurry, the application process for a major credit card may take a few weeks.

If you have to apply for a credit card, it may not be fast enough to help you in an emergency. In which case, it may be better suited for planned purchases and occasions — like traveling. Countries all over the world accept many of the major credit cards, making it an easy way to purchase things without carrying the local currency. A credit card may also be necessary when renting a vehicle or a hotel room.

You may have a very difficult time renting either of those things without a major credit card. Some hotels may still rent you a room with no credit card for a cash deposit or other arrangements. Some car rental agencies may accept a major (Visa, MasterCard, or Discovery) debit card in lieu of a credit card, but the majority do not.

How Do I Request a Line of Credit?

There are different processes for different types of lines of credit. Different financial institutions may assess your overall financial situation using their own proprietary formula. No two institutions use the exact same formula, but many of them are 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.

Woman applying for line of credit from her laptop and mobile phone

Hard Check vs. Soft Check

Hard inquiries are when a company or agency checks your credit to make a lending decision. A hard credit check is typically recorded on your credit report and may lower your credit score. This is why you need to authorize a hard check before a financial institution may use it.

By contrast, a soft credit 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. However, there's no differentiation between a hard a soft credit check on a subprime credit report.

How Do I Apply For a Credit Card?

In this day and age, it’s actually likely that a credit card may send you promotional offers. You might be 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 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 firmly offering you a functional credit 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 may run a “hard check” on your credit, which again, might hurt your credit rating. They may 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 the potential ding on your credit rating because of the hard inquiry. This may feel like a bit of a slap in the face.

Again, this process may 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 History Without a Credit Card

One key area where the line of credit and credit card are similar is that they may be able to help toy build your credit history.

Let’s take a look at both:

A Credit Card to Build Credit History

Using a major credit card to build your credit history 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 History

As long as your personal line of credit lender reports your payments to one of the major credit agencies, you may be able to use your line of credit to build your credit history. While this may eventually impact your credit score, it’s important to remember that your credit score is impacted by a number of different factors.

This strategy may only work if you keep a low balance and make on-time payments. 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.

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use

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