By Gayle SatoPersonal Line of Credit vs. Credit Card: Which Is Better?
By Gayle Sato
Which is better, a credit card or a personal line of credit? At times, it can be difficult to see the difference. Both a personal line of credit and a credit card are revolving accounts that allow you to borrow money when you need it and pay it off over time. Credit cards are the more popular option and are easy to use for spending, but credit lines can offer a lower-interest alternative to maintaining a card balance. Here, in a nutshell, are some of the key differences between credit cards and personal lines of credit.
| Credit Card | Personal Line of Credit |
|---|---|
| Revolving credit with a set limit | Revolving credit with a set limit |
| Interest rates are typically higher than on a personal line of credit | May be able to use collateral for a lower interest rate |
| A range of choices for those with credit scores high and low | Limited availability; typically reserved for borrowers with good to exceptional credit |
| Rewards or cash back | No added perks such as rewards |
What Is a Personal Line of Credit?
Like a credit card, a personal line of credit is a pool of revolving credit you can access and repay at will. You can use a personal line of credit to withdraw cash without paying a cash advance fee or use it to make purchases directly. If you're considering a personal line of credit, here are a few essential questions to ask:
- Is there an annual fee? Although you don't owe anything on your personal line of credit until you withdraw money, you may have to pay an annual fee to maintain it.
- How do I access my money? These accounts may come with checks or debit cards. You may also be able to use electronic transfers or visit a branch to move money into your bank account.
- What is my APR? Interest rates on these accounts vary, but rates as low as 10% can be had if you have good credit.
- What kind of credit score do I need to qualify? Your interest rate and terms may vary depending on your credit. Lower credit scores may make it harder to qualify, and may result in a higher interest rate if you are approved. Once you get a personal credit line, its impact on your credit is similar to a credit card. Check your credit score before submitting an application, and take steps to improve it if necessary.
- Do I need collateral? It's possible to nab excellent rates and terms on some personal lines of credit if you back the account with an investment or savings account. This could be a decent trade-off, as long as you're confident you can repay your debt.
- Is there a time limit for borrowing? Many personal lines of credit are open-ended, but some may have preset draw and repayment periods. During the draw period, you are free to use as much of your credit line as you'd like. Once the repayment period begins, however, you can no longer withdraw money.
- What other fees does the account carry? Ask about late fees, early repayment fees, withdrawal or transaction fees, and any other charges that may be associated with your account.
Why would you choose to use a personal line of credit over a credit card?
- Interest rates can be lower. Although rates vary on credit lines and as well as credit cards, lower APRs can be had with personal lines of credit.
- No cash advance fees. Generally speaking, you don't pay to access your money with a credit line like you would with a credit card.
- Your debt stands alone. Personal lines of credit can be useful if you want to maintain a separate debt account. For example, if your kitchen plumbing suddenly goes awry and you need $2,000 for a new sink and fixtures, you can pull the money and repay it separately from your other accounts—in deliberate installments or as quickly as possible.
What Is a Credit Card?
You already know what a credit card is, but consider how a credit card functions. Like a personal line of credit, your credit card represents an available pool of credit you can tap whenever you need it. Credit cards differ from personal credit lines in a few key ways, however:
- Credit cards are designed for spending. Need to buy something online, pay a bill or add a payment method to your mobile wallet? Your credit card was built for this.
- Credit card interest rates are usually high. Although APRs vary, credit cards are almost always going to be the more expensive way to borrow. A personal line of credit is likely to offer a better interest rate than your card.
- Credit cards offer rewards and other benefits. In addition to rewards points, miles or cash back, your credit card may also offer warranty protection on large purchases or special discounts with selected merchants.
With credit cards, the best interest rates, terms and rewards are reserved for those with the highest credit scores. You don't need an exceptional credit score to get a credit card, though. If you have a good or fair credit score—and can live with a higher interest rate or fewer perks—good credit cards are out there. A secured credit card with a security deposit that backs up your credit line can be a good option if you're just starting to build your credit. You can use Experian's card comparison tool to get personalized credit card offers.
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Personal Line of Credit vs. Credit Card: What's Better?
How do you choose between a credit card and a personal line of credit? Both options are useful. In fact, it's not unreasonable to have both.
Why get a personal line of credit? A credit line might be helpful if your income is sporadic. Say, for example, you're waiting on payment from a client and your monthly bills are due. A personal line of credit could provide the missing funds without triggering cash advance fees. You can make a purchase or borrow money and pay it back as soon as your client's payment goes through. Do you need a major car repair? Are you planning a wedding? A personal line of credit lets you track and pay off that debt off separately, possibly at a favorable interest rate.
Why get a credit card? Some credit cards offer some of the benefits of a credit line without having to open a new account. For example, your card may offer low-interest balance transfers that are even cheaper than a personal line of credit would be. Some cards now let you select large purchases to pay off in regular installments, often at a special low APR. A new credit card may offer an introductory 0% APR on purchases or balance transfers for a period of time. Credit cards come in handy for everyday spending. Book plane tickets, secure a hotel reservation, get a new television—you can do all this seamlessly and pay for it later.
What Works for You?
If you're choosing between a credit card and a credit line, the good news is that you have great choices. The fact that two types of revolving personal credit are available to you lets you pick the option that works best for your individual needs—or even choose both, as long as you use both accounts responsibly. One of the perks of having a good credit is a wider range of choices. Check your credit report and credit score for free through Experian to see where you stand.
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About the author
Gayle Sato
Gayle Sato writes about financial services and personal financial wellness, with a special focus on how digital transformation is changing our relationship with money. As a business and health writer for more than two decades, she has covered the shift from traditional money management to a world of instant, invisible payments and on-the-fly mobile security apps.
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