Personal Line of Credit vs Credit Card

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on November 26, 2023

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Overview of Personal Line of Credit vs Credit Card

A personal line of credit is a flexible loan from a bank or financial institution that allows an individual to draw funds up to a maximum limit, much like a credit card.

It offers a ready source of funds and can be used for various purposes, such as covering unexpected expenses or consolidating debts.

A credit card, on the other hand, is a plastic or digital card issued by a financial institution, allowing cardholders to borrow funds to pay for goods and services.

Credit cards offer convenience, reward programs, and the ability to build credit when used responsibly.

Personal Line of Credit

May Be Secured or Unsecured

A personal line of credit can be either secured or unsecured, depending on the borrower's creditworthiness and the lender's requirements.

Secured lines of credit are backed by collateral, such as a home or a vehicle, which serves as security for the loan. Unsecured lines of credit, on the other hand, do not require collateral and are based primarily on the borrower's credit history and income.

No Rewards Programs

Unlike some credit cards or other financial products, personal lines of credit typically do not offer rewards programs.

These programs often provide incentives, such as cashback or travel rewards, based on the user's spending patterns.

However, personal lines of credit focus more on providing a flexible borrowing option rather than offering rewards for purchases.

Generally Much Lower Rates, but Harder to Qualify

One of the significant advantages of a personal line of credit is that it generally offers lower interest rates compared to credit cards or other forms of unsecured borrowing.

This is because lines of credit are seen as less risky for lenders, as they are typically used for short-term borrowing and can be secured by collateral.

However, qualifying for a personal line of credit can be more challenging than obtaining a credit card, as lenders typically require a good credit score, stable income, and a strong financial profile.

Ideal Especially for Large, Ongoing, and Uncertain Expenses

A personal line of credit is particularly beneficial for individuals who have large, ongoing, or uncertain expenses. It provides a readily available source of funds that can be accessed whenever needed.

For example, if you are planning a home renovation project with costs that may vary over time, a personal line of credit can be an ideal financing option.

Similarly, if you anticipate irregular income or unpredictable expenses, having a line of credit can offer peace of mind and financial flexibility.

Credit Card

Almost Always Unsecured

Credit cards are typically unsecured, meaning they do not require collateral to be pledged as security for the credit extended.

Unlike secured loans or lines of credit that are backed by assets, credit cards are granted based on the borrower's creditworthiness and income.

Often Award Rewards Programs

These programs incentivize cardholders by offering various benefits, such as cashback, travel points, or discounts on specific purchases.

Rewards programs vary among different credit card issuers and can provide valuable perks for cardholders who actively use their cards for spending.

Easier to Qualify, but Often Has Higher Rates

Compared to other forms of borrowing, credit cards are generally easier to qualify for. Lenders often consider a broader range of applicants, including those with limited credit histories or lower credit scores.

However, this accessibility can come with higher interest rates, making credit cards a more expensive form of borrowing compared to secured loans or lines of credit.

Ideal for Consumer Spending and Building Credit Points

They offer convenience, security, and the ability to make purchases online and in-store. Additionally, responsible use of credit cards can help individuals build their credit history and improve their credit scores.

By making timely payments and maintaining a low credit utilization ratio, cardholders can establish a positive credit profile, which may lead to better borrowing opportunities in the future.

Comparison of Personal Line of Credit and Credit Card

Similarities of Personal Line of Credit vs Credit Card

Revolving Credit

Both personal lines of credit and credit cards offer revolving credit. This means that once the borrowed amount is repaid, the available credit is replenished, allowing individuals to borrow again.

This flexibility enables users to access funds as needed without having to reapply for a new loan or credit card.

Access To Funds

With a personal line of credit, borrowers can withdraw funds from the available credit limit as needed, either through transfers to their bank account or by using checks or a dedicated card.

Similarly, credit cards allow users to make purchases and obtain cash advances up to their credit limit.

Credit Utilization

Credit utilization refers to the percentage of available credit that borrowers are currently using.

By keeping credit utilization low, individuals can maintain a favorable credit score and demonstrate responsible borrowing habits, which can positively impact future borrowing opportunities.

Differences of Personal Line of Credit vs Credit Card

Repayment Terms

Personal lines of credit often have more flexible repayment terms compared to credit cards.

While credit cards typically require minimum monthly payments, personal lines of credit may offer more flexibility in terms of repayment schedules and options.

Borrowers may have the choice to make interest-only payments or repay the balance over a longer period, depending on the terms agreed upon with the lender.

Interest Rates

In general, personal lines of credit tend to have lower interest rates compared to credit cards. This is because personal lines of credit are often secured by collateral or require a higher creditworthiness threshold for approval.

On the other hand, credit cards are unsecured and typically come with higher interest rates, especially for users with lower credit scores.

Credit Limits

Personal lines of credit often have higher credit limits compared to credit cards, as they are intended for larger borrowing needs.

The credit limit for a personal line of credit is typically determined based on the borrower's creditworthiness, income, and the value of any collateral provided.

Credit card limits, on the other hand, may be lower and are determined by the credit card issuer based on the cardholder's credit history and income.

Similarities and Differences of Personal Line of Credit and Credit Card

Final Thoughts

Personal lines of credit offer flexibility, allowing individuals to borrow funds up to a maximum limit, similar to credit cards. They can be secured or unsecured, with lower interest rates, making them suitable for larger and ongoing expenses.

Qualifying for a personal line of credit may be more challenging, requiring a strong credit profile and stable income. Credit cards, on the other hand, provide unsecured borrowing options with easier qualification criteria.

They often come with rewards programs that offer incentives for cardholders and are ideal for consumer spending and building credit points.

There are several similarities between personal lines of credit and credit cards, such as revolving credit, access to funds, and the need to manage credit utilization.

However, there are also notable differences, including repayment terms, interest rates, and credit limits.

Ultimately, the choice between a personal line of credit and a credit card depends on individual financial needs, borrowing preferences, and creditworthiness.

Personal Line of Credit vs Credit Card FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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