Line of Credit vs Credit Card - Which One To Choose

A line of credit and a credit card are in practice the same thing: A loan that can be used at any time, repayment at a specific time and the borrower has no obligation to use the loan once approved. The actual differences between line of credit vs credit card are interest rates, fees, repayment terms and when to use either one.

Key Differences: Line of Credit vs Credit Card

A line of credit and a credit card are both forms of revolving credit that provide borrowers a convenient way to access or buy money. Understanding the difference between line of credit vs credit card can help you better navigate both topics. There are a number of notable differences between the two. The table below summarizes them.

Key Features	Line of Credit	Credit Card
Average APR	Typically, lower than a credit card, especially when secured with collateral	Typically, higher than a line of credit
Credit Limit	Typically, much higher than a credit card, especially when secured with collateral	Typically, much lower than a line of credit
Grace Period	No grace period	Typically, 21 days
Draw Period	Typically, a few years; longer periods exist, with some rare arrangements offering an infinite draw	Infinite draw period, assuming you make the required minimum payments
Fees	Potentially, activation fees, annual maintenance fees, draw fees, late payment fees, and returned payment fees	Potentially, annual maintenance fees, balance transfer fees, cash advance fees, late payment, and returned fees
Credit Score Requirements	Typically calls for good to exceptional credit	Wide availability for high to low credit scores, with increasingly high APRs
Rewards/Perks	No rewards/perks	Diverse rewards, including cash back statement credits
Common Uses	Significant outlays, such as capital expenditures, operating expenses associated with seasonal cyclicality, and emergency repairs	Recurring expenses, such as inventory purchases, rent, utility bills, and travel expenses.

When To Use a Credit Card or Line of Credit

In light of their differences, there are certain situations when using a line of credit is optimal and other situations where credit card utilization is more sensible.

A Line Of Credit is most useful when you have the potential for unexpected, large outlays. Especially if it is a revolving line of credit. It gives you the flexibility to address these issues without the need to precisely time and fund them via a cash reserve or a well-defined installment loan.

A Credit Card is most useful when your potential spend is low to moderate. It’s a highly convenient way to facilitate purchases without drawing down on your cash reserve.

You should only use a credit card for everyday spending if you intend to pay your bill off each month by the due date. Doing so you’ll avoid accumulating problematic debt, needing a debt consolidation loan and paying interest of 15-30 percent.

What is a Line of Credit ?

A line of credit is an automatic recurring loan up to a specified limit which you will pay for at an agreed point in time in the future.

Some lenders will use your current existing banking relationship to establish trust and once established, you can buy money as frequently as you like.

You only pay interest on the money you borrow. However you may be charged a fee each time you borrow from the business line of credit. The outstanding loan balance and interest simply revolve into the next billing period.

There are two types of lines of credit:

Secured

A secured line of credit is when you pledge objects of value such as business equipment or personal assets, like an automobile or home to lower the risk for the institution lending you money.

Secured lines of credit loans are less risky for lenders. They have better terms: lower interest rates, fixed-rate and variable-rate and longer terms of availability. Secured lines are much riskier for borrowers or buyers of money, because they put your assets at risk.

Unsecured

An unsecured business line of credit does not require a security pledge. This means there is a higher risk for the lender. As a result, to mitigate their risk, the interest rates or the price of the money you buy is often higher.

In addition their policy requirements are often more complex. They may require a cosigner which puts whomever that is at risk if you default.

How Does a Line of Credit Work?

Most lending institutions offer a combination of physical and electronic draw options:

Physical Transactions:

Your loan issuer or sales can give you checks to write. You may also be able to draw funds via in-person or over-the-phone transactions.

Online Transactions:

You can arrange to electronically execute draws (Receiving the loan or part of it which in effect is a purchase of money) via your personal computer, laptop, or smartphone.

There are two ways in which vendors offering credit lines determine the cost of the money you will be buying.

1. Variable Rate

A variable rate is an interest rate that fluctuates over time. It fluctuates because it is based on the governmental understanding of what the interest rate should be which, in turn, is dependent on many economic market factors that change.

For example: let's say that you need $1,000 to start a business. Professional Banana Lenders offer you a price of variable interest rate at prime plus 5%. That means that the interest rate or the cost of the money you are buying equals whatever the prime rate is plus 5%. If the prime rate is 4%, then your interest costs will be 9% of the amount you borrowed.

2. Fixed Rate

With a fixed rate, the interest charged on the amount you borrowed will not fluctuate throughout the life of the loan. It remains the same regardless of what is happening in the financial market economy that would affect the cost of the money or interest rate in the variable interest rate structure.

What is a Credit Card?

A credit card is a type of line of credit or financial mechanism that lends you money very easily and instantaneously.

This type of lending happens in real time as you buy something in-person, over-the-phone or online. They are also a form of a personal line of credit.

Most credit cards are unsecured and they carry high interest rates.
Those with the lowest interest rates and most flexible payment terms are reserved for borrowers with the highest credit scores.
You don't need an exceptional credit score to get a credit card.

How Does a Credit Card Work?

Making purchases with a credit card can be done by physically swiping or inserting the card in a terminal. You can also use it to purchase items by verbally communicating the card’s number, expiration date, and security code over the phone. Using a credit card can also be done by entering the card’s number, expiration date, and security code into an online payment form.

Once a transaction is processed the purchase amount is added to your account balance. This reduces your available credit and all purchases are tracked and reported to you, along with any accrued interest, via periodic billing statements.

Each billing period spans 30 days with payment due no less than 21 days following the issuance of the billing statement.

Most credit cards offer a grace period on each bill. Essentially, this allows you to avoid any interest charges by paying the entire balance by the due date.
If you pay less than the full balance, you lose the grace period privileges. This means you will be charged interest on the unpaid portion of the balance, and you will be charged interest right away on any new purchases.
You must pay at least the stipulated minimum amount by the due date. Failure to do so is likely to result in late fees, a higher APR, and a delinquency notice on your credit report.

Alternatives to a Line of Credit

An even better idea than using these types of money purchasing systems is to provide the money yourself:

Focus on saving. Establish a rigorous, but realistic budgetary framework – with a focus on generating savings each month. Gradually build up a money reserve you can tap for unexpected operational needs and capital expenditures.

Establish more lenient payment plans. Work with your key vendors to extend your payment terms. This can improve your near-term cash flows and give your more day-to-day flexibility.

Sell unnecessary fixed assets. Oftentimes, businesses acquire assets that become obsolete over time. Assess your stock of fixed assets to determine if you are holding onto any unnecessary equipment, furniture, or automobiles. Selling these assets could be an easy way to raise cash.

Leverage local support. Explore your community to find business associations, mutual assistance groups, and stimulus-oriented non profit organizations that can provide free consulting services, monetary grants, and donations of real assets to facilitate your business endeavors.

Key Points :

A line of credit provides you access to more cash, but the availability of the line is limited.
With a credit card, your access to funds is lower and costlier, but you have the ability to utilize the credit indefinitely.
Both a credit card and a line of credit loan can be beneficial, which is why many businesses maintain both.
Ideally, a credit card should be used for high volume transactions with relatively moderate costs, such as service subscriptions, travel expenses, meals, and supplies.
Conversely, a line of credit should be used sparingly, perhaps, for unexpected capital expenditures or operating expenses associated with seasonal changes.

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