Line of Credit vs Credit Cards

What is a line of credit?

A line of credit is an account that you create with a bank that allows you to borrow money whenever you need it by writing checks, using a debit card, or withdrawing cash from an ATM or branch location. When you apply for a line of credit, whether it is a home equity line of credit or a personal line of credit, you are given a particular spending limit that you may borrow as little or as much as you would like. For a home equity line of credit, typically this draw period spans for up to 10-years where you can either only make interest payments, pay on the principal, or pay off the entire loan balance. Any amount that is paid off is freed up and the borrower can use it again at any time during the draw period. Once the draw period closes, the home equity line of credit turns into a loan that typically comes with a 15 or 20-year term. For a personal line of credit, a borrower may be required to continuously make minimum payments on their line of credit, however, the more they pay off, the more spending power they can maintain. Both home equity lines of credit and personal lines of credit are ideal for situations where you know you are going to need access to larger sums of cash, however, you do not know exactly when and how much.

What is a credit card?

A credit card is a form of legal tender that may or may not be accepted by various merchants to pay for goods and/or services that a consumer would like to purchase with borrowed money. The credit card company and the consumer have an agreement that in exchange for the credit card company paying for the goods and/or services in advance, the consumer will pay applicable interest and any other fees agreed upon. Those purchases can be paid for overtime which allows the consumer to make larger purchases they may not have the cash for, or just to simply cover day-to-day expenses that can be repaid at a later date. Each credit card comes with a standard credit line that is determined based on the consumer's income and credit history. The consumer is free to use any or all of the credit line as long as they continue to make the minimum payments and fulfill any and all obligations of the consumer/credit company agreement. Some examples of credit card companies include Visa, Mastercard, Discover, and American Express. These companies are credit card companies and are not to be confused with banks who use these companies to offer a credit card consumer product to their customers. Some examples of banks that offer credit card consumer products are Capital One, Chase, Wells Fargo, and Bank of America.

What is the difference between a line of credit and a credit card?

The main difference between a line of credit and a credit card is that a line of credit gives you easy access to cash that can either be wired into your account, spent through a personal check or debit card, or withdrawn from an ATM or branch location. Credit cards often charge a premium for cash advances and are only accepted by particular merchants, whereas cash taken from a personal line of credit can be accepted anywhere. In addition, personal lines of credit tend to have lower interest rates than credit cards, and most often, they are harder to qualify for.

Is a credit card a line of credit?

No, although credit cards and lines of credit behave in many similar ways, there are some key distinctions that separate the two. For example, lines of credit tend to have lower interest rates and make accessing cash quite a bit easier than a credit card.

Pros & Cons of Lines of Credit vs Credit Cards:

Both lines of credit and credit cards can offer a quick and easy way to pay for larger purchases, fund projects, and/or cover day-to-day expenses on borrowed money that you can simply pay back through monthly payments or all at once when you get paid or have access to a larger sum of cash. Both lines of credit and credit cards have their pros and cons. Here is a closer look at the various pros and cons of both lines of credit and credit cards.

Line of Credit:

Lines of credit can be a powerful financial tool to pay for larger purchases, wedding expenses, do-it-yourself home improvement projects, or to consolidate debt.

Pros:

Borrow only the money you need, when you need it

Only charged interest on funds you use

Constant access to cash

Unsecured credit line with no risk of losing collateral

Few restrictions on how the money is used

Lower APRs than credit cards

Ideal for long-term projects

Cons:

Interest is not tax-deductible on a personal line of credit

Variable interest rates are harder to budget for

Requires good to excellent credit to qualify

Can come with maintenance fees

Easy access to cash can create the temptation to spend

Credit Card

If you are a consumer in the United States, there is a good chance that you have a credit. Credit cards can be used to make larger purchases or cover small daily purchases like dining out, paying for gas, and picking up groceries. Credit cards can be a useful financial tool that can build credit as long as they are used responsibly.
Pros:
Can help to build credit if used responsibly
Many credit cards have rewards and other perks
Fraud protection built-in
Enables you to travel without carrying a lot of cash
Easily track all your spending

Cons:

If not used responsibly, credit cards can lead to unnecessary spending and excessive debt

Interest rates can be much higher than other forms of credit

Missing a payment or making a late payment can greatly affect your credit score

How to check offers for a line of credit or credit card online

If you are looking to see if you may or may not qualify for a line of credit, you may first want to check with your personal bank or credit union to see if they can conduct a soft-pull credit check to see if your credit history and income are sufficient enough to open a line of credit. There are also a few online options for credit lines out there that you may be able to prequalify for on the lender's website.
When it comes to credit cards, you may already receive numerous pre-screened offers in your mail or email each week. You can go ahead and explore one of those options or you can find a website that may allow you to complete a prequalification process specifically to review credit card offers.
Last, if you belong to a credit monitoring service, like Experian for example, when you view your credit report, they may already have a number of pre-screened offers for you to review based specifically on your credit profile.
Obtaining a credit card is not a difficult task as many lenders have pretty low credit standards when it comes to approval, however, lines of credit may be a little more difficult to qualify for with higher credit score standards and income requirements.