Line of Credit Vs Credit Card: What’s the Difference?

Line of credit (LOC) is quite popular for businesses and property owners due to their flexible repayment and interest terms. However, individual customers prefer using credit cards that work as payment cards, rewards and offers.

Technically, a credit card is a type of unsecured LOC, but there is a huge difference between the two. Let’s explore what is a line of credit, how credit cards work, and the difference of line of credit vs. credit cards. 

Line of Credit And Credit Card Difference

Although quite similar, lines of credit and credit cards are different in many ways. Let’s see how.

Point of Difference	Line of Credit	Credit Card
Purpose	An LOC can be used to borrow any amount within a limit as many times you want to borrow.	A credit card is used to borrow short-term money to make payments.
Credit Period	Mostly LOCs are offered for a longer period, up to 15 years in case of HELOCs.	Credit cards come with a shorter credit period that may vary from borrower to borrower.
Interest Rates	LOCs usually carry lower interest rates than credit cards. However, late payment penalties are quite high for LOCs.	Credit cards carry higher interest rates than the LOCs.
Effect on Credit Score	Your credit score will be impacted significantly if you use more than 30% of your credit limits.	Credit cards also impact significantly on your credit score. It is one of the biggest factors to consider while calculating your credit score.
Rewards	LOCs don’t provide any rewards or offers.	Credit cards provide exciting offers and rewards.
Credit Score to Maintain	A personal LOC will need a credit score of 670 or higher.	A credit card will need a credit score of 700 or higher to enjoy better offers.

Now that we have covered the difference between line of credit and credit card, let’s dig deeper into each of these credit instruments.

What is a Line of Credit?

A line of credit means a preset credit limit up to which you can borrow any amount, repay, and borrow again until it is open. You use a LOC for various personal or business purposes e.g., to expand your business, to pay off your debt, etc.

In fact, you can pay your bills (personal or business) since it is cheaper than the other traditional debt arrangements. 

Examples of lines of credit include personal LOC, business LOC, home equity LOC (HELOC), demand LOC, etc.

How does a line of credit work?

Typically when you request a line of credit, your finance provider will conduct a credit check and decide based on your financial behavior, how much amount he can lend to you. That is the maximum amount you can borrow and a line of credit. 

They provide an agreement, and based on your purpose, you can agree to take secured or unsecured or revolving or non-revolving LOCs. Mostly, LOCs are revolving (open-ended – allowing you to borrow frequently) unless specifically mentioned in the agreement to make it non-revolving. 

How does a line of credit impact your credit score?

Your credit score drops when you borrow money more than 30% of your credit limit set in a LOC. Thus, you should keep your borrowings up to 30% in a line of credit.  

How long will your line of credit last? 

The period of a LOC depends on how long you will need to borrow the money. A regular HELOC lasts 10-15 years, while a personal or a business LOCs vary between 5 to 15 years. 

Is the line of credit the same as the credit limit?

A credit limit is the maximum amount you can borrow on a debt instrument, be it a credit card or any other instrument. Whereas a line of credit is a debt instrument with a maximum credit limit up to which you can borrow money. 

What’s the difference between a personal loan and a line of credit?

You borrow a personal loan from the lender with a lump sum amount and pay interest on the entire amount you borrowed. Whereas, in a line of credit you don’t pay interest for the entire credit limit, but only for the portion you borrowed.

Can you withdraw cash from line of credit?

Yes, a line of credit allows you to withdraw cash since many LOCs are offered these days in form of a card. However, for every amount you withdraw as cash, you have to pay interest as agreed in the LOC terms. 

However, whenever you borrow money from an LOC, it will impact your credit score, let’s find out how.

What credit score do you need to get a personal line of credit? 

A personal line of credit will require a credit score of 670 or higher since a good credit score can allow you to borrow money at a lower interest rate. 

Now that you have understood the LOC in detail, let’s see how credit cards work and find out the differences between the two.

What is a Credit Card?

A credit card is a payment card that allows you to make payments (pay bills, shop online, etc) on a credit basis. You can use credit cards for your payments and each month you repay the amount you used through credit cards. 

Credit cards typically have an annual percentage rate (APR) which means a yearly interest rate that you will have to pay if you don’t pay your credit card dues within a stipulated time. 

How does a credit card work?

When you apply for a credit card, the credit card issuer will run a credit check and decide a credit limit that you can use with a credit card. Once the credit card is issued to you, you can use it to borrow money for online or on-store purchases or bill payments. 

You have to repay the money borrowed either in full or in installments. However, when you repay in installments, you have to pay interest as well. 

FAQs on Line of Credit vs Credit Card

 

1. 1. Credit line card vs. credit card: What’s the difference?

A credit line card is an LOC that lets you borrow money within a credit limit provided by your finance provider. Credit cards let you buy goods or pay bills using a payment card on a credit basis. 

 

2. How Many Lines of Credit Should I Have?

If you don’t have any credit card or other debt, you can have as many as five lines of credit. However, the more you borrow (through different debt instruments – credit cards, loans), the fewer lines of credit you should have. 

 

3. What is a revolving line of credit vs. a credit card?

A revolving LOC is an open LOC that enables you to borrow any amount within a credit limit as many times you want. In other words, you can borrow, repay, and borrow again in case of a revolving LOC. Credit cards also allow you to borrow, pay and borrow again. 

 

4. 4. How are loans vs. credit card debt different from each other?

Loans allow you to borrow a lump sum amount and pay interest rate on the principal amount to repay them in a fixed time. A credit card is different than a loan since it allows you to borrow any amount within a credit limit as many times you want. 

However, you can’t borrow over a credit limit fixed for a credit card, whereas, a loan can allow you to borrow huge amount if you qualify for the same. 

 

5. 5. How often do credit card limits increase?

Most banks increase your credit card limits annually if you have been regular in paying your credit card dues. 

 

6. 6. What is better: a line of credit or a credit card?

Line of credit is cheaper than a credit card in a way that it allows you to borrow money at a lower interest rate. However, credit cards offer rewards, cash back and other benefits.