The Differences Between a Line of Credit and a Credit Card (and When to Use Each)

You don't have to choose one over the other, but these lending products have certain pros and cons.

If you're shopping for revolving credit, you've got a couple of different options. While both lines of credit and credit cards offer flexible borrowing options, they have distinct pros and cons that set them apart. It's a classic "square versus rectangle" situation: All credit cards are lines of credit, but not all lines of credit are credit cards. So while a credit card is connected to (and allows you to access) a line of credit, it’s possible to open a line of credit that doesn’t have a credit card associated with it. Here's what you need to know about some important differences between a line of credit and a credit card.

Access to funds

A line of credit allows you to borrow money up to a predetermined limit as needed. You can draw from this credit line at your discretion, often by transferring funds directly to your bank account. Credit cards, on the other hand, provide a revolving credit line primarily for making purchases and, in some cases, obtaining cash advances.

Interest rates

Interest rates typically favor lines of credit, which usually offer lower rates compared to credit cards. These rates are often variable, meaning they can fluctuate based on market conditions. Credit cards, in contrast, generally carry higher interest rates, which can be either fixed or variable depending on the card issuer and terms.

Repayment terms

A line of credit often requires minimum monthly payments, with interest charged only on the amount you've actually borrowed. This can make it a more cost-effective option for larger, long-term expenses. Credit cards require minimum monthly payments as well, but interest is charged on any unpaid balances, which can accumulate quickly if not managed carefully.

Fund withdrawal

With a line of credit, you can usually transfer funds directly to your bank account, giving you more flexibility in how you use the money. Credit cards are primarily designed for making purchases directly, although they do offer cash advances at typically higher interest rates—not a move I would recommend.

Fee structures

Lines of credit may have annual fees and withdrawal fees, depending on the lender and the specific terms of the agreement. Credit cards often come with annual fees, balance transfer fees, and higher cash advance fees, in addition to potential penalties for late payments or exceeding your credit limit.

Impact on credit score

Lines of credit may have less impact on your credit utilization ratio, which is an important factor in credit scoring. Credit cards, however, can significantly affect this ratio, potentially having a larger impact on your credit scores depending on how you use and manage the card. Here are some more ways to give your credit score a boost.

Best uses

Lines of credit are typically ideal for financing large expenses, home improvements, or serving as emergency funds. Their lower interest rates and flexible withdrawal options make them well-suited for these purposes. Plus, a personal line of credit gives you more flexibility than a one-time personal loan. Credit cards are better suited for everyday purchases, building credit history through regular use and timely payments, and earning rewards such as cash back or travel points.

What this means for you

When deciding between a line of credit and a credit card, consider your financial needs and habits. If you're planning a large expense or want a financial safety net, a line of credit might be the better choice. Its lower interest rates and flexible withdrawals can save you money in the long run. But for most people's everyday spending, building credit, and earning rewards, a credit card is the more suitable option. It's also simply the more widely accepted option for regular purchases.

Your credit score may benefit more from responsible use of a credit card, but a line of credit could be less risky if you're concerned about overspending. Consider your ability to manage credit responsibly. We all know how credit cards can lead to high-interest debt if not paid off monthly: If you're feeling cautious, lines of credit might offer more breathing room with potentially lower rates. And remember, it's not as if you're limited to choosing just one. Many people find value in having both a line of credit and a credit card, using each for its strengths to create a comprehensive approach to personal finance.