Credit Card vs. Line of Credit: Which One Is Better?

two arrows pointing to a credit card

A credit card vs line of credit, which one should you use? Look, we can’t all be Bezos. At some point, we all need to borrow money for something because we don’t have stacks of cash on hand. Many credit options are available when you need to borrow money. Two of the most common include lines of credit and credit cards.

But which one is better? With their similarities, it is good to know the difference between credit cards vs lines of credit so you can make the best decision for you. Here’s how each one works, and when to use one over the other.

Debt is inevitable, use it wisely

There comes a time in many people’s lives when you need to make a purchase, but you don’t have the available cash upfront. In situations like these, people turn to credit to help them make purchases they otherwise couldn’t afford.

Using credit isn’t necessarily a bad thing. Sometimes you need to buy something important, like a house, a car, university tuition, or essential repairs to your home. Situations like these can be seen as an investment. You may have to borrow the money, but the purchase will also help you gain equity and eventually (hopefully) make money.

Taking an investment risk is why so many people take out student loans, for example. Many Canadians can’t afford tuition without loans, so they use credit, hoping they will eventually make more money than if they hadn’t taken out a loan to finance higher education.

What is a Line of Credit?

A line of credit is a type of loan you can get from a financial institution, like a bank or credit union. It allows you to take out money up to a pre-determined limit and pay it back according to a particular schedule.

You can use your line of credit, pay it back, and borrow money again as many times as you would like on a line of credit. Your line of credit is only charged interest on the amount you borrow. There is no cost for having an open line of credit with no balance owing.

Line of credit vs traditional loan

Many people take out a line of credit for large purchases or repairs. The difference between a traditional loan and a line of credit is that loans are typically for a specific purchase, like a house or car, whereas a line of credit can be used for any reason. There are different kinds of lines of credit, including a business line of credit, but for the purpose of this article, we will be focusing on personal lines of credit.

Limits, interest, and payments

A line of credit typically has a much higher borrowing limit than a credit card. Higher limits make them more versatile and better suited for emergencies when you require immediate access to significant sums of money.

The interest rate and payment plan for a line of credit are also typically better than a credit card. With a line of credit, you may have more flexibility in how and when you repay the money borrowed instead of having a strict monthly payment deadline with a credit card. Interest rates for lines of credit are also typically lower than credit cards. 

Secured & unsecured

You can get either a secure or unsecured line of credit. Secured lines of credit use a personal asset as collateral. Signing on for collateral means you can offer a significant personal asset like your house, car, cash, or another valuable, as a sort of “insurance” for the bank if you don’t repay your line of credit.

Secured lines of credit often have lower interest rates or more convenient terms for repayment than unsecured lines of credit. You are taking on significantly more personal risk with a secured line of credit, so be sure you can repay any money borrowed on your line of credit before agreeing to offer something valuable, like your house, as collateral.

What are lines of credit used for?

Typically, people use a line of credit for large purchases because they have high credit limits and will cost less interest than other options. Some places may also not accept credit cards as payment, meaning you need to borrow cash from your line of credit.

Lines of credit can also be used for consolidating your debt. Instead of owing multiple institutions money (which can put you in a bad financial situation very quickly), you can pay off all your debts using a line of credit. Then you only need to make payments on one loan instead of several loans.

Lines of credit can also be used as overdraft protection for your bank account, saving you from overdraft fees.

Home Equity Line of Credit (HELOC)

HELOCs are secured lines of credit that use your home as collateral. These loans borrow against the equity already built up in your home.

For example, if you have paid off a major portion of your mortgage balance and now own 50% of your home, you’ll borrow from this 50% equity. HELOCs can be used to buy anything, but they’re often put towards home renovations or emergency repairs. You can even use a HELOC to invest.

Credit Card

Credit cards are more common than lines of credit, but that doesn’t mean they are better. Credit cards are designed for everyday purchases and should ideally be paid off in full each month. If not paid off in full, you will need to make a minimum payment on your card monthly to avoid hefty fees and damaging your credit score.

Outstanding credit card balances are subject to high-interest rates. Many people slowly spiral into debt due to outstanding credit card debt and interest fees that consistently mount when you don’t pay your balance in full every month. Since it can be hard to pay back large purchases in the short span of a month, credit cards are more suited for smaller, everyday purchases.

Credit cards aren’t all bad, though. Many credit cards come with reward programs that can give you points to put towards groceries, travel, merchandise, and more. With a line of credit, you are missing out on some of these perks. When used wisely, you can even make money with a credit card.

Credit cards are also accepted almost everywhere and are relatively easy to get, with a credit card product available for almost any credit score.

Pros & cons of a credit card vs line of credit

Looking at the overall positive and negative aspects of a credit card vs a line of credit can help you decide which is the right option for you. Lines of credit typically have lower interest rates, more flexible repayment options and much higher credit limits.

Credit cards can have extremely high-interest rates, which can quickly put you in debt if you carry a balance. They also must be paid back monthly and don’t have as high of a borrowing limit as lines of credit.

On the other hand, the lower credit limit on credit cards and strict payment plans can help you stay disciplined and avoid using credit unless absolutely necessary. Lines of credit can be tempting to borrow against.

Credit cards also don’t carry the same personal risk as a secured line of credit. Putting your house up on a line of credit can be risky, but credit cards don’t require any collateral.

Credit cards are also accepted at most retailers. Plus, many credit cards have rewards programs that aren’t available on lines of credit. Collecting credit card reward points could give you money towards paying for groceries, travel, and more!

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You must also show more stringent proof of financial security before taking out a line of credit. For people with poor credit history, getting a lower-limit credit card may be easier than getting approved for a line of credit.

Arthur Dubois is a personal finance writer at Hardbacon. Since relocating to Canada, he has successfully built his credit score from scratch and begun investing in the stock market. In addition to his work at Hardbacon, Arthur has contributed to Metro newspaper and several other publications