Whether you want quick and easy access to credit or you’re looking for a bigger pool of cash to tap into, it helps to know the difference between a line of credit and a credit card. Learn more about the pros and cons of each type of credit, so that you can make an informed choice about which option best suits your needs.
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What is a line of credit?
A line of credit is a flexible loan linked to your bank account that maintains a balance you can draw from. It’s a bit different from a regular loan in that you only pay interest on the money that you take out, rather than the money that’s available to you.
For example, when you take out a regular loan for $25,000, you’ll start paying interest on the whole amount right off the bat. When you take out a line of credit for the same amount, you’ll only accumulate interest on the money you withdraw from it. So if you transfer $1,000 from your line of credit to your bank account, you’ll only pay interest on the transfer, not the $24,000 left over on your line of credit.
There are two types of credit that you can get with a line of credit, outlined below.
Secured. This line of credit is insured by some form of collateral or an asset like your house. If you can’t make your payments, the bank is allowed to sell whatever you put on the line to get their money back.
Unsecured. An unsecured line of credit isn’t backed by any asset or collateral. Instead the bank relies on your credit history (including credit scores, debt-to-income ratio and other factors) to determine your eligibility.
How is a line of credit different from a credit card?
Use of card. A credit card is better for small everyday purchases while a line of credit is typically used to pay for big-ticket items as well as business and emergency expenses.
Annual fees. You won’t pay an annual fee on a line of credit, but you often will on a credit card.
Interest rates. The interest you’ll be charged on a line of credit will typically be much lower than on a credit card.
Incentives. Unlike credit cards, a line of credit won’t offer rewards or bonus offers.
Credit limit. You’ll typically get a much higher credit limit on a line of credit than on a credit card.
Secured vs unsecured. A line of credit will often be secured, whereas credit cards are often unsecured.
Cash advances. You won’t be charged for a cash advance on a line of credit.
Common features for lines of credit
Good credit score. You’ll need to have a credit score that’s at least above 650 to qualify for a line of credit. Check out our guide to credit scores for more information on minimum limits.
Large amounts. The maximum amount you can borrow varies, but can reach as high as $500,000.
Low interest rates. The main draw of a line of credit is the low interest rate which typically ranges between 3% and 5% (as opposed to 20% on the average credit card).
Flexible repayment. You can take money out on your own terms and repay on a more flexible schedule than what’s required by a credit card.
Secured. You’ll need to be ready to put up an asset or other form of collateral to secure the loan. This means that you’ll need to make absolutely sure you can make repayments or the bank could sell off whatever you put on the line.
No annual fees. There are no additional fees to have a line of credit, so you’ll save money upfront.
Common features for credit cards
Fast Cash. Credit cards are the most convenient form of credit since you can instantly pay with your card instore and online.
Small purchases. They’re best suited to small purchases and typically come with a maximum limit below $10,000.
High interest rates. They usually have high interest rates, so they’re best suited for borrowers who know they can make their payments on time every month.
Rewards. They’re designed to let you earn cashback or rewards on all of your purchases.
Benefits. Many cards also come with benefits like extended warranty, roadside assistance, travel insurance and more.
Pros and cons of each
This table provides a short summary of the pros and cons of each type of credit.
Types of Credit
Line of Credit
Lower interest rates
Good for cash advances
No annual fee
Can’t use for online purchases
Good for online purchases
Higher interest rates
Bad for cash advances
Strict repayment schedule
Which option is right for me?
The option that’s the best fit for you will really depend on your current situation.
Line of credit
A line of credit is suited to people who want access to a large pool of cash for emergency or business expenses. It can be used to help pay for tuition, medical bills, home renovations, salaries and other major expenses.
You’ll need to have a good credit score and be ready to put up an asset or another form of collateral to secure the loan. This means that you’ll need to make absolutely sure you can make repayments or the bank could sell off whatever you put on the line.
Credit cards are useful for people who want fast access to cash and rewards in return for everyday purchases. They can be used to buy just about anything, from gas and groceries to electronics and clothing.
Cards are typically suited to people who want to earn cash back and rewards on purchases, as well as added benefits like extended warranty and insurance. Credit cards are especially useful for customers who can commit to making monthly payments on time and avoid paying ongoing interest.
If you’re trying to decide between a line of credit and a credit card, it helps to know how much money you need and when you can pay it off.
Frequently asked questions
A line of credit can be used to help pay for large or unexpected expenses. It’s a good fit if you’re not sure how much money you’ll need but you want to have a set amount available at a moment’s notice. For example, if you’re a homeowner and you want some back-up cash in case your furnace breaks, then a line of credit could help.
You’ll typically need a credit score above 650 as well as assets to secure the loan. If you have a credit score of 750 and own your own home, you’re much more likely to qualify then if you have a score of 550 and you can’t put up any collateral to cover the loan if you’re unable to pay for it.
No. A line of credit doesn’t offer rewards or benefits in the same way that a credit card does. The major perks of a line of credit are that you’ll get a much lower interest rate and a bigger pool of money to draw from.
Claire Horwood is a writer at Finder, specializing in credit cards, loans and other financial products. She has a Bachelor of Arts in Gender Studies from the University of Victoria, along with an Associate's Degree in Science from Camosun College. Much of Claire's coursework has focused on writing and statistics, with a healthy dose of social and cultural analysis mixed in for good measure. She has also worked extensively in the field of "Blended Finance" with the Canadian government. In her spare time, Claire loves rock climbing, travelling and drinking inordinate amounts of coffee.
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