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Line of Credit or Credit Card – What Makes Sense for Me?

 Published on February 3, 2023

Line of Credit or Credit Card – What Makes Sense for Me?
If you need a financial helping hand, there are a lot of potential options out there that may be available to you. But how do you decide what is going to work best for your situation? It can be tricky. First, you’ll need to have a clear understanding of the state of your finances, and from there, you’ll have to have some level of knowledge of the financial products that may be available to you. When going through this process, you might come across some products that seem nearly the same on the surface. In this case, we’re referring specifically to credit cards and lines of credit. So, how are these two products similar, and what makes them different? Our goal today is to explore the answers to these questions to help you make a more informed choice when deciding what type of personal loan may be right for you.

Line of Credit vs Credit Card – How are They Similar?

So, is a personal line of credit virtually the same thing as a credit card? Well, not quite, but they do have some fundamental similarities. The main overlapping feature between the two is that they are both a type of revolving credit. What this means is that if you’re approved for either product, you’ll gain access to a credit limit that you can tap into when you need to, as long as you have available credit. You can choose how much money you use, and when you use it. Person looking at computer wondering whether to apply for a line of credit or credit card. So, for example, let’s say that your credit limit is $2,000, and you find yourself needing $500 to help you handle an emergency expense. In this case, you can choose to use $500, which you can then pay back (with any applicable fees and interest) and borrow funds on an ongoing basis. This means that in this scenario, you could use $500, pay back $400, use another $200, and then pay back $300 with whatever charges you’ll be required to pay depending on the product, and so on. This is why it’s called “revolving” credit. This way of borrowing is distinct from a number of other types of personal loans, like, for example, installment loans. With installment loans, if approved, you’ll be given a lump sum of cash. Interest will then start to accrue on whatever money you’ve borrowed, and you’ll be required to pay back what you owe over a series of scheduled payments. If you need more money after you’ve finished paying off your loan, you’ll need to go through the borrowing process again.

Line of Credit vs Credit Card – How are they Different?

So, we now have a basic understanding of how a revolving line of credit and credit card work similarly, but it’s just as important to understand how they’re different. Generally speaking, a personal line of credit will be offered by different lenders and credit cards are usually offered by major credit card companies who will often partner with other institutions like major banks, department stores, and more.

How am I Charged Interest on my Credit Card?

Firstly, it’s important to understand that your annual percentage rate, also knows as APR, is an important part of how your interest is calculated. When it comes to your credit card, your APR will either be fixed or variable. If it’s fixed, it’ll generally remain the same but could shift if you make a late payment or if your card was on an introductory offer that has expired. A variable rate will change based on the prime rate. There are other types of APR that you could also be charged on your credit card, like:
  • Purchase APR
  • Balance transfer APR
  • Cash advance APR
  • Introductory APR
  • Penalty APR

How do Perks Factor in?

One of the biggest differentiating factors between a credit card vs a line of credit is that with credit cards, there’ll usually be some sort of perk or rewards system that comes with using that card. For example, this could be cashback rewards which will give you a small percentage of every purchase back in the form of cash. Some cards may have some sort of travel rewards system which will give you travel points on some or all your purchases which can then be used for paying for flights, hotel rooms, or vacation packages. Person entering credit card info into a laptop.

Why Would I Apply for a Line of Credit?

One important thing to consider when you’re thinking about a personal line of credit vs a credit card is what they’re intended to be used for. In many cases, a personal line of credit is often intended to be used as a financial safety net. No one can predict the next time a leak will spring in a water pipe in their basement, or when they’ll run a flat tire and need to take their car in for a repair. When an emergency expense weasels its way into your life out of nowhere, a line of credit can be an effective option to help you deal with it in the short term.

Why Would I Use a Credit Card?

A credit card can be used for either of the situations we’ve mentioned above, or anything that falls into the realm of an emergency expense. On top of that, they can also be used for everyday purchases. Having said that, if you need money quickly and don’t have a credit card, it may not be your best short-term option. With a credit card, the application process can often take weeks, and if you need money quickly, it may not provide the fast solution you’re looking for. With that in mind, it might be a better tool for planned expenses. On top of that, it can be useful for things like car rentals, hotel rentals, or just general purchases made abroad, as most countries will accept the majority of major credit cards. Conversely, with some lines of credit, the application process can be as fast as a single business day.

How Do I Apply for a Personal Line of Credit?

Depending on the lender you’re working with and what type of line of credit you’re applying for, the application process can vary. Each individual lender has their own requirements for assessing your creditworthiness. While two lenders will likely not have the exact same requirements, they’ll likely look at a lot of the same variables. This can include things like your credit history, your income, and your employment. Overall, their goal is to determine how big of a risk they would be taking on if they decided to lend to you.

How Do I Apply for a Credit Card?

Nowadays, it’s not uncommon for a credit card company to seek you out instead of the other way around. Maybe you’ve already received plenty of offers for credit cards in the mail, or maybe you get asked if you want to sign up for a new card every time you go to a large department store. In any of these situations, the perks and rewards offered are going to be pushed to the forefront, but it’s important to remember to read the fine print. In the end, everything advertised is subject to approval. Another thing to remember is that when you get an “offer” in the mail, a lot of the time, it’s no guarantee that you’ll be approved for a credit card. Often, what you’re really getting is an invitation to apply. Three people looking at tablet deciding whether to apply for a line of credit or credit card. Regardless of whether you’re applying for a credit card over the phone, online, or in person at a bank or department store, the process is going to be relatively similar. There’s a good chance that they’ll perform a hard inquiry into your credit history, which can slightly hurt your credit score. On top of that, they’ll also likely look at your income and employment. If your application gets approved, your credit card will be sent in the mail and may take a few weeks to get to you. If you don’t get approved, your credit score will still be impacted in the same way it would be if you got approved. Just remember that the entire process can take several weeks, so if you need money sooner, you may need to look elsewhere.

Do Research Before Deciding Between a Line of Credit or Credit Card

Like we said at the beginning, there are all sorts of financial products out there for you to sift through when you’re in need of some extra cash. If it’s not a world you’re familiar with, it can be a challenge. But ultimately, it’s in your best interest to take the time to do the research needed and put yourself in the best position to make an informed decision. So, take your time in learning more about the differences between a personal line of credit vs credit card, assess your personal situation, and try to find what works best for you!

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