Line of Credit vs. Credit Card: What’s the Difference?

It's More Than Just How You Access the Credit

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Access to revolving credit allows you to borrow money when you need it and conveniently repay over time. Banks offer two types of revolving accounts: a line of credit or a credit card. Credit cards are used more commonly, but there are situations where a line of credit may better fit your needs.

A line of credit may be good for larger purchases that you want to pay off at a lower interest rate, while a credit card is beneficial for everyday purchases. Understanding the differences can help you figure out which type of account is best for your current and future needs.

What’s the Difference Between Lines of Credit and Credit Cards? 

A credit card and a line of credit both offer revolving credit, but they have some key differences. 

  Line of Credit Credit Card
Eligibility Existing banking relationship, qualified credit history Qualified credit history
APR Relatively low, can be lowered with collateral Relatively high, promotional APRs available
Annual fee Usually none Varies by credit card
Best for Expensive purchases, paying over time at a low interest rate Regular, everyday spending
Rewards/Perks No rewards, rate discount for banking customers may be offered Rewards and perks depending on the credit card
Collateral requirements Common Rare, only for secured credit cards

Eligibility

Finding and qualifying for a credit card is easier since they're offered by most banks and credit unions. A limited number of banks offer lines of credit for personal use, especially unsecured lines of credit. 

Banks that do offer lines of credit typically require you to have an existing checking, savings, or investment account to apply for a line of credit. Line of credit products may be limited to states where banks have physical branches, which can make these harder to access.

All the top 10 U.S. banks offer at least one credit card, but only half of the largest banks offer a personal line of credit.

Cost

Personal lines of credit tend to have lower interest rates compared to credit cards and borrowers may have an opportunity for even lower rates by having an existing account or using collateral.

With credit cards, saving on interest takes a bit more planning. You can pay your full balance each month or take advantage of a card with a promotional 0% interest rate.

Annual fees are fairly common with credit cards, especially cards that offer better rewards and perks. Personal lines of credit, on the other hand, generally don't often charge any ongoing or transaction fees, other than interest.

Ideal Use

Because a personal line of credit gives you access to a large amount of available credit, it's better used for large purchases that you might not have a high enough credit limit to accommodate. For instance, you may use a line of credit for home improvement, to consolidate debt, or to pay for wedding expenses.

Credit cards are the better option for more routine spending, especially when you can pay your balance in full. Depending on the credit card, you can earn rewards on purchases and access perks like purchase protection, extended warranty, and trip cancellation insurance.

Collateral Requirements

In some cases, a bank will require collateral for some types of lines of credit, particularly if you're accessing a large line of credit. Collateral can be non-retirement stocks and bonds, money you have in a CD or savings account, or equity in a home. Even when it's not required, offering collateral can make it easier to qualify and allow you to access much higher credit lines or lower interest rates.

Credit cards have far more options for credit limits that don't require collateral. In fact, only a specific type of credit card—secured credit cards—requires collateral, generally for cardholders who are establishing or rebuilding credit.

Many banks limit the maximum security deposit on secured credit cards, which means you can't take full advantage of your savings or investments to get a higher credit limit.

Which Is Right for You?

Whether a credit card or a line of credit is right for you will depend on a number of factors about your personal circumstances and how you need to use the credit. 

A line of credit might be right for you if:

  • You need flexible access to cash for large purchases
  • You want to take advantage of the buying power of your assets without liquidating them
  • You prefer lower interest rate financing

A credit card might be right for you if:

  • You have a low credit score and few non-retirement investments or savings
  • You don't have large expenses coming up
  • You want to take advantage of rewards or promotional interest rate

A Best-of-Both Worlds Option

Most people have a range of financial needs that include both short-term everyday spending and larger expenses. Having both a credit card and a line of credit allows you to access the type of credit you need at any time with the flexibility to pay the balance over time. You can use as much or as little of your credit as you need and it becomes available for you to use again as you pay your balance down.

How To Get a Line of Credit or Credit Card

You can typically apply for a credit card or a line of credit online. You'll provide your personal information like your name, address, Social Security number, and income. In some cases, you'll find out whether you've been approved instantly, and how to access your credit card or line of credit right away.

Since approval and interest rate is based on your credit rating, checking your credit score before applying can give you a sense of whether you'll be approved and the type of interest rate you may receive.

If you're offering collateral for a line of credit, be prepared to provide account statements to show the value of your investments and deposit accounts. Some banks may require you to apply over the phone or in person.

The Bottom Line

Credit cards are easily accessible, which makes them great for everyday spending, but they tend to carry higher interest rates and lower credit limits. A line of credit provides more spending power at a lower interest rate but isn't as widely available. Since both types of accounts can be used as needed, it could be beneficial to have both options.

Frequently Asked Questions (FAQs)

Which banks offer lines of credit?

Banks that offer lines of credit include U.S. Bank, Truist Bank (the merger of BB&T and Suntrust), PNC Bank, TD Bank, and Goldman Sachs are among the largest U.S. banks offering lines of credit.

How much will my line of credit be?

The amount of your credit line depends on the bank, whether you're applying for a secured or unsecured line of credit, the amount of collateral (if required), and your credit qualifications. You can generally get approved for a higher line of credit if you have a large number of deposits or investments to offer as collateral.

How long does it take to get approved for a line of credit or credit card?

It can take a few seconds or a few days to get approved, depending on the product and financial institution. Credit cards can often be approved faster.

How do you get a credit card with no credit?

If you're a student and have your own independent income, try applying for a student credit card. Being added as an authorized user on someone else's credit card can help you jumpstart your credit history so you can apply for your own credit card. Making a deposit on a secured credit card is another option to opening a credit card with no credit.

Article Sources

  1. American First. “Line of Credit.” Accessed Jan. 31, 2022.

  2. PNC Bank. “Personal Line of Credit.” Accessed Jan. 31, 2022. 

  3. U.S. Bank “Unsecured Personal Line of Credit.” Accessed Jan. 31, 2022.

  4. Goldman Sachs. “Securities-Based Lines of Credit.” Accessed Jan. 31, 2022.

  5. Capital One. “Explore Credit Cards & Apply Online.” Accessed Jan. 31, 2022.

  6. SunTrust. “Personal Lines of Credit.” Accessed Jan. 31, 2022.

  7. America First. “Line of Credit.” Accessed Jan. 31, 2022. 

  8. Discover. “Discover it Secured Credit Card to Build Credit History.” Accessed Jan. 31, 2022.

  9. Consumer Financial Protection Bureau. “2021 Consumer Credit Card Market Report.” Page 77. Accessed Jan. 31, 2022.