Credit Card vs Line of Credit: Which Financing Option is Best for You?
If you have a big upcoming expense and are trying to decide if you should use a credit card vs line of credit, we’ve got you covered.
We explore 10 key differences between these two common financing options below.
Before we dive in, let’s make sure we’re using and understanding the same terminology.
A credit card is one type of revolving line of credit. Revolving means that once you pay back the amount of credit you’ve used, you are then automatically re-extended that credit.
So if I have a revolving line of credit for $10K, spend $5K, then pay back that $5K, I once again have up to $10K in credit, or spending power. You can probably already see that this is how your credit card works.
There isn’t really such a thing as a “non-revolving line of credit,” that would essentially just be a typical installment loan.
So, credit cards are really just one type of revolving line of credit. For this rest of this article though, we we refer to lines of credit, we’re referring to other types of lines of credit besides credit cards, like Home Equity Lines of Credit (HELOCs), Securities Backed Lines of Credit (SBLOCs), and others.
Looking for payment options other than a credit card instead?
If you landed on this article, but are actually looking to understand how you can make a payment with something other than a credit card, instead of understanding different payment options, which is what this article is about, then check out our guide to credit card payment alternatives: Credit Card Alternatives: A Guide To Exploring 15 Different Options
Credit card vs line of credit: 10 key differences
1. What is the best use case?
Generally, credit cards are better for everyday expenses like groceries and shopping. They’re accepted almost everywhere and usually have limits that support this level of spending.
Lines of credit are usually a little harder to use and make a payment with, so they tend to be better for larger purchases, like a car, college education, or an addition to a house.
2. How easy is it to use?
Credit cards are incredibly easy to use (maybe a little too easy!) and with recent technology developments only require a tap of your phone to a terminal or a quick swipe. Making a payment essentially doesn’t get any easier, even using cash can be more difficult – especially if you don’t have exact change.
Using a line of credit, like an SBLOC, for example, can be a little more tricky. Often it involves signing into that line of credit’s web portal and typing in the merchant or vendor’s information. The actual payment method is often an Electronic Funds Transfer or Wire Transfer, which can require extra information, take time, and cost additional fees. This is why using a line of credit instead of a credit card typically only makes sense for those larger purchases.
3. Is it secured, do I have to pledge collateral?
Credit cards are generally not secured. There are, of course, exceptions. Many large credit companies do offer a secured credit card, where the borrower has to first put up cash to then borrow against, primarily as a way for people with poor or no credit to build or rebuild their credit. If your credit card does not specifically say secured or did not require an upfront down payment, it is unsecured.
Lines of credit, on the other hand, generally are secured by pledged collateral. A HELOC for example is secured through a home, as the name implies. Similarly, an SBLOC is secured through securities held at a brokerage. Of course, there are exceptions to this too, and unsecured lines of credit do exist and are sometimes offered by financial institutions.
While not necessarily required, this is often offered as part of “relationship banking” where the financial institution knows your financial situation well, perhaps because you already have several products with them, and they thus feel comfortable extending you a line of credit they’re confident you can repay.
4. What is the difference in interest rates?
When it comes to internet rates, lines of credit typically have a huge advantage over credit cards. Credit cards tend to have some of the highest, if not the highest interest rates of just about any type of financing or borrowing. So they’re not hard to beat.
Typically, you will see credit card interest rates hover around ~20% or so. If you have a strong credit score you might be a little lower around 17% and if you’re weaker, you might be more like 22%. We have seen credit card interest rates as low as ~12% for the best borrowers at some credit unions and as high as ~30% for store co-brand cards.
Interest rates for lines of credit tend to be more volatile and can change rapidly during major macroeconomy shifts. They also vary with the amount withdrawn, with financial institutions generally offering lower rates for larger withdrawals. We’ve seen rates for $1M+ during good economic times for as low as 2-3% and we see a line of credit rates tend to top out around 10-12% during tougher economic times for smaller withdraws under ~$75K.
5. What is the difference in rewards?
This one is simple, we’ve never seen a line of credit offer rewards like travel points or cash back.
It’s relatively easy to get a credit card with rewards, on the other hand, provided you have reasonably good credit (roughly a credit score over 660).
While there are all different sorts of credit card rewards programs, from travel points to cash back, which can be difficult to compare, the reality is simply that the vast majority end up being worth about ~1-2% of purchases made and paid off.
6. Credit Card vs Line of Credit: which has a higher limit?
Typically, lines of credit tend to have higher credit limits than credit cards. While this does not HAVE to be the case, it’s certainly possible to have one particular credit card limit above one other line of credit, this tends to be the case on average.
Most credit card limits are in the $10-30K range per card. Of course, there are larger and smaller ones, but that’s the average. Additionally, many credit card issuers have a rule that across all cards, the total credit line extended to any one customer can only add up to $50K.
On the other hand, many lines of credit only start at $75K. This is because there are certain government rules and regulations that kick in under this amount that are more onerous for the financial institution to comply with. They prefer to not have to deal with these, for only small amounts.
Again, the above are rough guidelines, there are many exceptions.
7. What is the repayment schedule?
Credit cards and lines of credit both have flexible repayment schedules. This means that you can repay at your convenience, rather than on a fixed payment plan like with an installment loan.
Typically, to avoid paying any interest, you will need to repay purchases on your credit card within one month of purchase (note: this can vary a bit depending on your exact billing cycle and where in that cycle the purchase was made).
Lines of credit, on the other hand, often do not have a grace period like credit cards and start accruing interest immediately.
8. How hard is it to set up or obtain a credit card vs line of credit?
Credit cards tend to be very, very easy to apply for and obtain, especially if you have good credit. You can often be approved and start using your card instantly if your credit is strong enough. Even with slightly weaker credit, you still might be approved within a few days.
Lines of credit, on the other hand, are much more variable. While some can be setup in as fast as 24 hours, others can take 4-6 weeks. They also often have much more difficult applications, requiring more detailed information, often about the collateral you’re pledging. They may also have significant legal documentation to review and sign and you may want to consider having your lawyer review this material, so there can be an additional cost as well.
9. Are both types of financing revolving?
Yes, both credit cards and lines of credit are revolving. That means that when you pay back the amount you’ve withdrawn, that amount will automatically be added back to your available credit line.
This is in contrast to more traditional loans, like mortgages, where the amount of credit is issued once upfront and is not replenished as you make payments.
10. How will each affect my credit score?
Most, but not all, credit cards will make monthly reports to all three of the major credit bureaus.
Lines of credit have more variability and this is a concern, you may want to check with your specific lender. While many lines of the credit report to all three bureaus monthly, just like a credit card, we see more variation around if they report to all three and how they report. Some will make the report as if the line of credit is an installment loan, which changes your credit score calculation slightly, and in rare instances, we’ve seen no reporting at all.
- Consumer Financial Protection Bureau
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Cody is the founder and owner of Personal Finance Guru. His day job is as a management consultant at one of the Top 3 firms (think Mckinsey, Bain), where he advises Fortune 500 C-suite clients on their most important and pressing business problems. He completed his business education at Harvard Business School.
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