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

All credit cards are a type of line of credit, but not all lines of credit function as credit cards. They differ in how you access funds, repayment terms and APR. Here's how to understand how they are different.

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Key Differences Between a Line of Credit and a Credit Card

What Is a Line of Credit?

A line of credit is a revolving loan from your bank or credit union. You can borrow as much as you want up to the approved limit. As you borrow money, your available credit will decrease — and as you repay , your available credit will replenish.

With a line of credit, you'll only pay interest on the amount of credit you use. Interest often begins to accrue as soon as you use your credit line, so paying it back quickly is key to avoiding excessive fees.

Lines of credit are especially helpful if you intend to make large purchases that can't readily be paid off — think auto repairs, education expenses and even business expenses. That's because they tend to have lower interest rates than a credit card.

What Is a Credit Card?

Similarly, a credit card is a revolving line of credit — often with a set limit. Your available credit will increase and decrease as you use it and pay it off.

Credit cards also only charge interest on the amount you borrow. Unlike a line of credit, you'll usually only pay interest on a balance that you carry month-to-month. In other words, you'll have a grace period of nearly a month to repay your debt before you're charged interest.

Credit cards are offered by banks and credit unions and are most frequently used for small purchases that you can pay back within a month, such as:

• Grocery shopping

• Gas for your car

• Monthly expenses, such as streaming services and other subscriptions

How Does a Line of Credit Work?

A line of credit typically involves a three-to-five-year window called a "draw period."

During this time, you can borrow and repay money as you need it. Once the window closes, the line of credit is no longer revolving. You'll either be obligated to pay back all the money you owe at once, or you'll be placed on monthly installments.

Lines of credit may be either secured or unsecured, depending on the type. For example, a personal line of credit (PLOC) is generally unsecured. You can quickly apply online, similar to a credit card.

Meanwhile, a home equity line of credit (HELOC) is secured, as it uses your home as collateral. HELOCs often require much more effort to open, such as a home appraisal and mortgage statements.

How Does a Credit Card Work?

Credit cards, on the other hand, never stop revolving. As long as you continue to pay down your balance and your account doesn't become delinquent, you'll always have borrowing power. The bank may proactively raise or lower your credit limit depending on how responsible you are with your credit.

A credit card may also be secured or unsecured. Traditional cards don't require collateral, but some that are targeted at those with limited or poor credit history will ask for a refundable security deposit upon account opening. Your credit line often mirrors the size of your deposit.

Pros and Cons: Line of Credit vs. Credit Card

Line of Credit Pros

• Potentially higher borrowing power than a credit card

• Interest rates often more reasonable than a credit card

• Revolving credit comes with more flexibility than an installment loan

Line of Credit Cons

• No interest-free grace period after making a purchase

• Often a finite lifespan of a few years

• May incur extra costs, such as origination fees, home appraisal fees, etc.

Credit Card Pros

• Often a grace period of at least a few weeks to pay off purchases before interest is incurred

• Convenient way to make everyday purchases

• Some cards earn rewards for spending

Credit Card Cons

• High interest rates

• Turning a portion of your credit line into cash generally incurs penalties

• Some cards charge annual fees

How To Choose the Right Option for You

How To Apply for a Line of Credit or a Credit Card

Applying for both a credit card and a line of credit is often a similar process. The bank or credit union will ask for your Social Security number, income even your occupation, depending on what you're applying for.

If you're opening a business line of credit or a business credit card, you'll have to share some information about the nature of your business. Unless you're applying for a HELOC, which often involves details like mortgage statements and homeowner's insurance, you can often be approved for both a line of credit and a credit card immediately — though you'll probably need a current relationship with a bank to be instantly approved for a line of credit.

To open either a line of credit or a credit card, you'll have the best odds if your score is at least "good" — 670 or above — though it's possible to be approved with "fair" credit. But you'll have far from the most favorable interest rates and credit limits.

If you can help it, wait to apply until you reach a 670 credit score. Keep your credit utilization low and continue to make on-time payments with your current accounts, and you'll get there eventually.

FAQs

Which is easier to get?

A credit card — particularly a secured card — is often easier to get than a line of credit. That's because some banks require an existing relationship and a healthier credit profile to be approved. Some credit cards are marketed toward those with thin or bad credit history.

Which has lower interest rates?

Lines of credit tend to have lower interest rates than credit cards.

Can I use either for everyday purchases?

You can use either for everyday purchases, but you should avoid using a line of credit for smaller transactions that can easily be handled by a credit card. That's because lines of credit begin accruing interest immediately. Credit cards do not.

How do they affect credit score?

Both a line of credit and a credit card affect your credit score similarly. Upon opening your account, the lender will perform a hard inquiry on your credit to decide if you're a trustworthy borrower. This will temporarily lower your score. But as you make on-time payments, your credit score will bounce back — and likely be higher than before.

Can I switch from one to the other later?

You can't switch from a line of credit, such as a PLOC or HELOC, to a credit card, or vice versa. You'll need to open an entirely new account.

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