When borrowing money or dealing with financial institutions, one will often come across the phrases “line of credit” and “credit card.” While similar, they are two different forms of money borrowing. This article will help explain some of the differences.
A line of credit is any loan or credit source given to a group or individual by a bank, with the promise that this group or individual will pay it back in the future. In other words, any credit source given to a group or individual is known as a line of credit. The phrase ‘line of credit’ is used more often, however, to refer to a personal line of credit. A personal line of credit is a loan with a predetermined maximum amount, and a consumer who gets a line of credit can only spend up to this maximum amount. Where regular loans will accrue interest usually from the moment they are given, a line of credit will not charge interest until it is used, and will only charge interest on the amount used. Lines of credit will often have low interest rates, and no charge for cash advances, and the money on a line of credit can be transferred between accounts.
A credit card is a card which is given to consumers as a method of payment. Credit cards will have a maximum limit, and are often part of a separate type of account from the consumer’s regular bank account, meaning money cannot be transferred between the credit card and other accounts such as a checking account. The account made for a credit card is known as a revolving account, meaning the balance on the card (the total amount of purchases made with the card) does not have to be paid in full every month, but there is a monthly minimum payment to be made. If no payment is made, the debtor will be charged interest. Most credit cards have a period of time where the debtor does not have to pay before they are fined, known as a grace period. Debtors will be charged for cash advances using credit cards. Credit cards are a line of credit, but not a personal line of credit.
|(Personal) line of credit||Credit card|
|Lower interest rates.||Higher interest rates.|
|No grace periods or rewards.||Grace periods and rewards.|
|No charge for cash advances.||Charge for cash advances.|
|Balance transferable between accounts.||Balance not transferable between accounts.|
|More often used by businesses.||More often used by individuals.|
Line of credit vs Credit card
What are the differences between a line of credit and a credit card? A credit card is a form of a line of credit, which is any loan or credit source given by a bank, and so the difference that will be discussed is the difference between a personal line of credit and a credit card. The main differences are:
- Interest rate
- Grace period and rewards
- Cash advances
- Type of consumer that typically uses each
Credit cards have higher interest rates than personal lines of credit. The interest rate associated with credit cards is up to 28 percent, where personal lines of credit usually only have interest rates of 1 to 3 percent above the bank’s prime rate.
Personal lines of credit do not have grace periods, nor do they have rewards. Credit cards, however, do. A grace period is the amount of time a debtor can postpone payment until they are charged with late fees, usually in the form of interest. A reward is a sort of incentive program, where the spender receives something back for the money he spends. A well-known credit card reward program is Air Miles.
Using a credit card for a cash advance will almost always have a charge associated with the cash withdrawal. Personal lines of credit have no such charges.
The credit on a credit card cannot be transferred to another bank account. For example, if a consumer wanted to transfer 50 dollars from their available credit on a credit card into a checking account, they would not be able to do this. The money in a personal line of credit can be transferred between accounts.
Credit cards are typically used by individual consumers, whereas personal lines of credit are more associated with businesses or corporations.
The video below explains some of the differences between a line of credit and a credit card.