How Is a Line of Credit Different Than a Credit Card?
Highlights from this article:
Both offer revolving credit, but lines of credit may have higher limits and lower interest.
Lines of credit suit large expenses, while credit cards are better for everyday spending.
Credit cards offer rewards and convenience, but typically come with higher interest rates.
A credit card and a line of credit are both ways to borrow money on a recurring basis, up to a pre-set limit. And you may pay interest on both depending on how quickly you repay what you borrow. But the two products differ when it comes to rate of interest, ease of use and potential perks.
How a line of credit works
A line of credit is a type of revolving credit, similar to a credit card. You can use however much money you need (up to the pre-set limit) and only pay interest on what you borrow. There is no deadline to pay back your line of credit, which means you can pay it off as quickly or slowly as you like, as long as you make minimum monthly payments.
Lines of credit are offered by financial institutions and may be subject to administrative fees. Once your line of credit has been approved with a specified limit, you can access the money by:
Writing a cheque from your line of credit.
Using the account to pay off a bill.
Transferring money from the line of credit to your chequing account via online, mobile or phone banking.
Every month you will get a statement indicating how much you’ve borrowed and the minimum payment due.
Line of credit interest rates are often variable, which means your rate will change over time. Your credit score may affect the interest rate you're charged — people with higher credit scores often pay lower interest rates.
How using a line of credit compares to a credit card
Credit cards and lines of credit work in similar ways, but have several key differences. Before you choose one over the other, consider convenience, how quickly you can pay off your debt, and how much money you need to borrow.
LINE OF CREDIT | CREDIT CARD | |
|---|---|---|
Potential fees | • Registration or administrative fee. • Monthly or annual maintenance fee. | • Annual fee. • Cash advance fee. • Foreign exchange fee. • Late payment fee. |
Accessing and using funds | • Cheque. • ATM. • Online banking. | • In-person and online transactions. • Convenience cheque. • ATM. • Online banking. |
Interest | A lender’s prime rate plus a percentage. Interest is charged from the day you borrow money until it is fully repaid. | A variable rate, usually around 20%. Interest is charged if you don’t pay your bill in full each month, though a 21-day grace period applies to purchases. |
Rewards | None. | May offer cash back, rewards points, and/or sign-up bonuses. |
Insurance coverage | None. | May offer extended warranty, purchase protection, travel insurance, and/or auto rental insurance. |
Contributes to credit history | Yes. | Yes. |
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When to use a line of credit vs. a credit card
Lines of credit are better for large purchases
Credit limits for lines of credit typically start at $5,000 and may reach into the six figures, depending on your credit history and lender.
Interest rates for lines of credit tend to be lower, too — at least compared to those offered by credit cards. This combination of a high credit limit and lower interest rate makes a line of credit practical for big transactions and unexpected purchases.
A line of credit may be useful when:
You need a higher credit limit.
You plan to take longer than a month to pay back a large balance.
Credit cards are better for everyday spending and earning rewards
Credit cards can be used for in-person and online transactions, and may earn points or cash back. This makes credit cards a convenient choice for everyday spending. But credit cards tend to charge higher interest rates than lines of credit, which means you may pay more interest on borrowed funds if you don’t pay your balance in full monthly.
A credit card may come in handy if:
You only need access to a limited amount of money.
You can pay off your balance every month, or at least make more than the minimum payment.
You want to take advantage of any points or rewards programs.
Line of credit: pros and cons
Pros
Often have lower interest rates than credit cards or personal loans.
Allow you to apply once, then have access to the money whenever you need it.
Can be used for whatever you want.
Can help you avoid other fees, such as overdraft fees in your chequing account.
Cons
Interest rates vary and can be changed by the lender at any time.
Easy access to money could encourage overspending and lead to financial trouble.
Can take a long time to pay off if you’re only making minimum payments.
Credit card: pros and cons
Pros
May earn rewards.
May offer insurance coverage.
Can be used for in-person and online transactions.
Cons
Fees are common.
Typically have higher interest rates than lines of credit.
Frequently asked questions
Can a line of credit affect my credit score?
Yes. Opening and using a line of credit can impact your utilization rate, which will affect your credit score. Late payments may also impact your credit.
Can I use a line of credit to pay off a credit card?
Yes, you absolutely can. This strategy could help you move your debt from a high-interest card to a lower-interest line of credit, so you pay less interest as you work on paying off the balance.
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