Line of Credit vs Credit Card: What’s the Difference?

If you’re looking for a way to make purchases or handle everyday expenses, you might consider a credit card or line of credit. Both involve borrowing money to help you access the funds you need, but they function in different ways. Let’s explore the key differences between a credit card and a line of credit to help you choose the right option for your situation.

What is a credit card?

A credit card is a financial tool that allows you to borrow funds up to a certain credit limit — the highest amount the card issuer allows you to access — to make purchases, pay for services or get cash advances. When you use a credit card, you are borrowing money from the card issuer. You can use a credit card for everyday expenses like groceries or gas, or larger, one-time purchases and pay the charges back later. Credit cards are a form of revolving credit which means that once you repay what you’ve borrowed, you’ll have more credit available, up to your credit limit.

Managing your credit card responsibly may help improve your credit score, a number that lenders use to gauge your creditworthiness.

How does a credit card work?

You can use a credit card to make purchases or pay for services in person, online or over the phone. Some ways of using credit cards include tapping or swiping your card, scanning a digital wallet or entering your credit card information online. When you make a charge on your credit card, the amount of the payment is deducted from your credit limit.

You may also use a credit card to get a cash advance which is when you borrow against your credit limit to withdraw cash from an ATM or participating bank.

Credit limit

When you get a credit card, the credit card issuer will determine your credit limit, typically based on risk factors like your income, creditworthiness and credit score.¹ Generally, a borrower with a strong credit score may qualify for a card with a higher credit limit, whereas a borrower with a lower credit score may either be offered a lower credit limit or may not qualify for the card.

Repayment

Credit cards typically have a fixed billing cycle of about one month, so purchases you make during one cycle will become due at the end of the next.² You may make a minimum payment, pay the statement balance or pay the full balance of the credit card.

Interest and fees

All credit cards have an annual percentage rate (APR), which is the annual cost of using the card.³ The APR includes interest and some fees. A credit card may have several different APRs, such as a purchase APR and a cash advance APR, so the interest and fees you pay depend on how you use the card.

Some cards have a grace period between the initial purchase and the statement balance due date, so if you pay the full balance each billing cycle, you won’t be charged interest.⁴ Even if your card has a grace period, it may not apply to some transactions, like cash advances, which begin to accrue interest right away.

Credit cards may have fees for late payments or spending over the credit limit. Annual fees are also common on cards that allow you to earn rewards, airline miles and statement credits with your purchases.

Other considerations

Credit cards can either be secured or unsecured. With a secured credit card, you make a cash deposit to the credit card issuer which serves as your credit limit. If you’re unable to make payments on the balance, the card issuer may use your deposit to recover what they loaned. Secured cards may be a good option for borrowers who are new to credit or rebuilding credit. An unsecured credit card does not require a deposit.

What is a line of credit?

A line of credit is another form of revolving credit. You can borrow any amount up to the account’s credit limit, repay what is owed and then borrow again. While a credit card is a good option for everyday purchases, a line of credit generally provides access to a larger sum of money than a credit card. A line of credit may be helpful for a home improvement project or debt consolidation, for example.

How does a personal line of credit work?

A line of credit can be borrowed and repaid many times as long as the borrowed amount stays within an approved limit. Lines of credit use draw periods which is the period of time during when funds can be withdrawn. The line of credit will have a repayment period which is the due date by when the borrowed funds must be repaid.

Depending on the financial institution, you may receive a card tied to your line of credit that you can use to make purchases. You might need to access the funds by transferring money from the line of credit to your checking and savings account or writing a check.⁵

Credit limit

Like a credit card, a line of credit has a preset limit that you can’t exceed. Typically, lines of credit have higher limits than credit cards, but this can vary depending on factors like your credit score, creditworthiness, income or collateral.⁶ Like credit cards, lines of credit are revolving, so you can borrow, repay and borrow again from the full credit limit.

Repayment

A line of credit has a draw period which is the time frame that you’re allowed to borrow up to the account limit as many times as you’d like. After the draw period comes the repayment period. During the draw period, you’ll typically need to make minimum monthly payments, but you don’t need to repay the balance in full until the repayment period ends.⁷ Timelines differ between lenders and lines of credit, but a typical draw period for a personal line of credit is five years, and a typical repayment period is seven years.⁸

Interest and fees

While credit cards may have grace periods, lines of credit do not, so you pay interest on the full amount you withdraw regardless of when you make your payment.

Lines of credit often have different fees than credit cards. Depending on the lender, these may include:⁹

• Origination fee: Onetime fee for the cost of opening the account
• Draw fees: Fee charged each time you withdraw money during the draw period
• Maintenance fee: Annual fee charged to keep the account open
• Penalty fees: Fees charged for missing payment due dates, paying below the minimum requirement or exceeding your borrowing limit
• Inactivity fee: Some lenders charge this fee if you don’t use the line of credit for a certain period of time
• Early termination fee: A penalty for closing or paying off your line of credit earlier than planned

Other considerations

Like a credit card, a line of credit may be secured or unsecured, and the type of collateral you offer may depend on the type of credit you apply for. For instance, you might secure a personal line of credit with a vehicle. For a home equity line of credit (HELOC), your house might serve as collateral, allowing you to borrow against the equity in your home (the current value minus the amount you still owe on your mortgage).¹⁰ Your credit limit is often influenced by the value of your collateral.

Both lenders and credit card issuers offer lines of credit, but they may have different qualification requirements. Generally your credit score, income and the value of your collateral will impact your approval, credit limit and interest rate.

Like a credit card, responsibly managing a line of credit could help build your credit. And if you don’t repay what you borrowed according to the terms of your agreement, your credit score may be affected.

Credit card vs. line of credit

Both a credit card and a line of credit are ways to borrow money and build credit, but they differ in some important ways.

	Credit card	Line of credit
Access to funds	Revolving, up to your credit limit, accessed via physical card or card number	Revolving, up to your credit limit, accessed via card, bank transfer or check
Interest	Usually variable11	Usually variable12
Collateral or deposit	Only required for secured cards	More commonly required
Due dates	Must make minimum payments every month	Must make minimum payments every month and there is a final date by which you must repay everything you’ve borrowed
Grace period	Usually yes if you pay your balance in full by the due date	No
Common use cases	Everyday purchases, bills large expenses	Larger purchases or unexpected large expenses

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Take control of your borrowing options

Both a credit card and a line of credit can be valuable tools to help you manage your finances. A credit card may be a better short-term option for everyday purchases, while a line of credit may be more helpful for longer-term projects or unexpected big expenses. Understanding how credit options work can help you make more informed borrowing decisions. If you’re not sure which makes more sense for your situation, consider speaking with a financial advisor or lender.

Sources

1 https://www.investopedia.com/articles/credit-loans-mortgages/081516/how-credit-card-companies-determine-credit-limit-expn.asp
2,3 https://www.experian.com/blogs/ask-experian/what-is-billing-cycle/
4 https://www.investopedia.com/articles/01/061301.asp
5 https://www.bankrate.com/loans/personal-loans/what-is-a-personal-line-of-credit/
6 https://www.bankrate.com/credit-cards/advice/line-of-credit-vs-credit-card/
7,8,11, 12 https://www.experian.com/blogs/ask-experian/what-is-a-line-of-credit/
9 https://www.nerdwallet.com/ca/p/article/credit-cards/line-of-credit-vs-credit-card
10 https://www.investopedia.com/ask/answers/110614/whats-difference-between-secured-line-credit-and-unsecured-line-credit.asp