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Credit Card vs Line of Credit: What's the Difference?
Key takeaways
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Credit cards may allow direct purchases with potential rewards and grace periods, while lines of credit may require transferring funds to your bank account first
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Other lines of credit typically offer lower interest rates than credit cards but may start charging interest immediately, with no grace period or rewards programs available
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All these products could affect your credit score through payment history and utilization, making them useful for different purposes like everyday spending versus larger expenses
Credit cards and other lines of credit (LOC) are types of revolving debt. A bank or other financial institution approves a credit limit. The customer can borrow, making monthly payments to repay what is used and borrow again (within the credit limit) as needed.
LOCs are flexible resources that allow individuals and businesses to borrow money, up to a credit limit, as needed. Borrowers are charged interest only on the borrowed funds. A home equity line of credit (HELOC) is an example of an LOC.
Understanding the difference between credit cards and other lines of credit could help you decide on the right option for your financial situation. You may even benefit from both. In this article, we’ll break down how credit cards work, how other lines of credit work, and the impact of their use on your credit score.
Credit card vs. line of credit: Key differences
While all these products are revolving credit options, there are several differences.
1. Interest rates
Credit cards. Annual percentage rates (APRs) on credit cards depend on your credit profile, the card issuer, and market rates in general. Credits cards often have variable interest rates. Also, one credit card account could have different rates for different types of transactions, such as purchases, cash advances, and balance transfers
Other lines of credit. Other lines of credit frequently come with lower APRs than credit cards, particularly if they’re secured by collateral. This typically positions them as one of the lowest interest borrowing options available to qualified borrowers. Home equity lines of credit (HELOCs), for instance, might offer lower rates than what you’d find on most credit cards. In addition, some HELOCs offer fixed-rate options, which provide better money management, and interest-only variable rates, offer better monthly cash flow than credit cards
2. Interest timing
Credit card. Most credit cards offer a grace period, which won’t accrue interest if the statement balance is paid in full by the due date
Other lines of credit. Interest usually starts accruing as soon as you draw funds from a credit line. There’s generally no grace period, so even if you plan to repay the amount quickly, you’ll likely owe at least some interest on the borrowed sum. In either case, it's important to understand minimum payments and repayment terms
3. Rewards and perks
Credit card. Many credit cards come with rewards programs that let you earn cash back, points, or travel miles on purchases. Beyond rewards, some cards also provide benefits like extended warranty protection, purchase protection, fraud coverage, and travel insurance.
Other lines of credit. Other lines of credit typically don’t offer rewards or additional perks. They’re designed primarily as a borrowing tool rather than a purchasing tool.
4. Ideal use cases
Credit card. The combination of convenience, potential rewards, and a grace period can make this a good option for routine spending, especially if you’re using a credit card for everyday purchases and paying your balance in full.
When to use a credit card:
- Day-to-day spending (groceries, gas, subscriptions)
- Travel and online purchases
- Short-term expenses you can pay off quickly
- Situations where rewards and purchase protections matter
- Balance transfers and consolidating debt, when promotional rates are available
Other lines of credit. Many people prefer using other lines of credit for larger expenses or projects where a single swipe on a card may not be ideal. When you aren't sure what the exact cost will be for something like a wedding or home remodeling project, other lines of credit provide more flexibility than a personal loan, which locks you into a set amount with fixed payments.
When to use other lines of credit:
- Larger expenses and longer timelines
- Home repairs, medical bills, or irregular costs
- Cash-flow gaps (especially for business owners)
Borrowing with rates that may be lower.
5. Secured vs. unsecured
Credit card. Most credit cards are unsecured, meaning you don’t need to put up collateral to qualify. Secured credit cards require the card holder to first submit a cash deposit, which helps to determine the credit limit on the account. Secured cards are good tools for people who want to build credit or improve a low credit score.
Other lines of credit. These may be unsecured or secured. A HELOC, for example, is secured by your home. Secured lines of credit might take longer to establish and could require an appraisal
6. Credit limits
Credit card. Credit limits on credit cards and lines of credit can differ widely. Credit card spending limits depend on factors like your income, credit score, and the issuer’s policies. These limits are often smaller than what you might get with other lines of credit, though high-end credit cards for individuals with strong credit can offer substantial limits.
Other lines of credit. Credit limits on other lines of credit may be significantly higher than credit card spending limits, especially with secured options like HELOCs, where the limit is tied to your home equity.
7. How funds are accessed
Credit card. You can use a credit card directly at the point of sale, whether you’re shopping in-store, online, or paying through digital wallets like Apple Pay or Google Pay. You’re essentially borrowing money in real time as you make purchases.
Other lines of credit. With other lines of credit, you could have different options for accessing funds. These may include transferring funds to your checking account or savings account and spending them from there, using access cards, using special checks, or making online transfers to pull funds from your line of credit.
What are the pros and cons of credit cards?
Let’s look at the difference between credit cards and other lines of credit another way—the pros and cons. First, we'll consider credit cards.
Pros
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Widely accepted for daily purchases. Credit cards are accepted at millions of locations worldwide
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Can earn cash back or rewards. Depending on the card, you might earn a percentage back on purchases, accumulate points for travel, or receive other rewards
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Grace period on purchases. If you pay your statement balance in full each month, you might avoid interest charges altogether
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Strong fraud protection. Credit cards often come with robust fraud protections, limiting your liability for unauthorized charges and making disputes easier to resolve
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Convenient for online and in-store use. Whether you’re shopping on your laptop or paying at a store register, credit cards offer seamless payment experiences across platforms
Cons
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Interest may accrue immediately. You might start paying interest as soon as you draw from your line of credit
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No rewards. You won’t earn cash back, points, or other perks
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Variable rates may increase over time. Although some lenders offer fixed-rate HELOCs, many lines of credit have variable interest rates that can rise if market conditions change
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For secure lines, your home may be at risk. If you default on a HELOC or another secured line of credit, the lender could potentially foreclose on your collateral. These lines of credit also could take longer to establish
Which is right for you?
Ultimately, which borrowing option is right for you depends on how you plan to use the money, how quickly you can repay it, and whether rewards or lower rates matter more.
A credit card might make sense if you want:
- Everyday spending power
- Travel or cash back rewards
- Protection on purchases
- Short-term borrowing with a grace period
Other lines of credit might make sense if you need:
- Flexible access to cash
- Funds for larger purchases and expenses
- Lower interest rates
- Emergency or business financing
How each affects your credit score
Credit cards and other lines of credit can influence your credit score in similar ways, though there are some nuances worth noting. Both types of credit can help build your score if managed responsibly, but they can also cause harm if you miss payments or max out your available credit. Here’s how they compare across key credit factors.
1. Payment history. Your payment history on both types of credit is likely to be reported to the credit bureaus, and making on-time payments can help strengthen your score. Conversely, late or missed payments can damage your credit considerably. They can potentially stay on your report for up to seven years.
2. Credit utilization. Credit utilization (how much of your available credit you’re using) plays a significant role in many credit scores. Credit utilization is based on all your revolving credit accounts, including credit cards and other lines of credit. Keeping balances low relative to credit limits is a smart move with both products.
3. Credit mix. Having a credit card and/or other lines of credit can contribute to your credit mix. It's not a major part of the most common credit scores, but it still indicates that you're capable of handling different types of credit.
4. Credit inquiries. Applying for a new credit card or opening other lines of credit results in a hard inquiry. That means a lender pulls your credit report, or reports, to determine whether you are creditworthy. A hard inquiry could cause your credit score to drop by a few points.
FAQs
There are several differences to consider. Credit cards tend to have higher interest rates than other lines of credit. Credit cards may offer a grace period that enables you to avoid paying interest if you time your payments a certain way, but interest usually starts accruing as soon as you draw funds from other lines of credit.
Many credit cards come with rewards programs, while other lines of credit typically are designed primarily as borrowing tools rather than purchasing tools and don’t offer rewards or perks. Also, credit cards are ideal for routine spending while other lines of credit tend to have higher credit limits and are useful for covering large purchases and expenses
Credit cards often offer cash back, points, or travel miles on purchases, along with additional perks like extended warranties or purchase protection.
Other lines of credit, however, are structured as borrowing tools rather than spending incentives, so they don’t typically come with rewards programs.
Credit cards, however, often offer cash back, points, or travel miles on purchases, along with additional perks like extended warranties or purchase protection.
It depends on the terms. Credit cards sometimes offer promotional APRs that can be useful for balance transfers and consolidating debt, but fees may apply and the rate can increase after the promo period ends.
Other lines of credit may also be used to pay off higher-interest balances. For example, some lenders offer fixed-rate HELOCs that are ideal for debt consolidation. It’s a good practice to compare rates, repayment expectations, and whether the line of credit is secured.
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