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 annual percentage rate (APR). Here’s how they compare.

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Line of Credit vs. Credit Card: Quick Take

• A line of credit accrues the moment you withdraw funds. You’re often given a higher limit and a lower interest rate and borrow what you need. A line of credit comes in handy when you have a large, unexpected expense.

• A credit card has a grace period of 21 to 25 days for purchases. If you pay the full amount every month, you don’t owe interest, which makes it an ideal way to charge day-to-day expenses.

Use a Line of Credit When

• You need a high limit — up to $50,000.

• You want a lower APR.

• Your costs are unpredictable.

• You need actual cash.

Use a Credit Card When

• You're managing day-to-day expenses.

• You have the opportunity to get points and other rewards.

• You're utilizing 0% introductory offers.

Key Differences Between a Line of Credit and a Credit Card

Choosing between a line of credit and a credit card may mean taking a look at the differences:

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.

Types of Lines of Credit

There are several types of lines of credit, each designed for different borrowing needs:

Good To Know

Personal loans are usually structured as installment loans with fixed payments, while lines of credit are revolving — meaning you can borrow, repay and reuse funds as needed.

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

Keep In Mind

• Line of credit interest: Accrues the moment you withdraw funds

• Credit card interest: Accrues only if you carry a balance after the grace period

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. Here are some examples:

• A personal line of credit is generally unsecured. You can quickly apply online, similar to a credit card.

• A 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 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.

• Unsecured credit card: Does not require collateral and is typically available to borrowers with established credit.

• Secured credit card: Requires a refundable security deposit, which usually becomes your credit limit and is often used to build or rebuild credit.

Quick Cost Examples

To understand the cost difference, here’s a side-by-side example:

• Credit card: If you make a purchase of $100 and pay before or on the due date, you’ll only pay $100. You pay interest only if the balance carries over.

• Line of credit: If you get a line of credit for $2,000, the interest accrues immediately. There’s no grace period. In 30 days, you’ll owe $2,018.18.

Line of Credit: Pros and Cons

Credit Card: Pros and Cons

How To Choose the Right Option for You

Confused about whether to choose a credit card or line of credit for a purchase? These guidelines may help:

• You can pay your credit card balance in 30 days 👉 Choose a credit card

• You have a large emergency expense 👉 Choose a line of credit

• You like earning rewards on your purchases 👉 Choose a credit card

• You need a higher credit limit 👉 Choose a line of credit

• You have large purchases you can’t pay off quickly 👉 Choose a line of credit

• You have multiple balances that you want to consolidate 👉 Choose a line of credit

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 application process is similar to other types of personal loans, though requirements may vary by lender.

• The bank or credit union will ask for your Social Security number, income and 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.

• 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.

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.

Line of Credit vs. Credit Card FAQs

Which is easier to get?

A credit card is often easier to get than a line of credit. That's because some of the best 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 histories.

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 a 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 personal line of credit or HELOC, to a credit card, or vice versa. You'll need to open an entirely new account.

Does a HELOC have a grace period?

No, a HELOC doesn’t have a grace period. The interest accrues once you start withdrawing funds.

Can you transfer a line of credit balance to a credit card? 

Most credit card companies allow you to transfer personal lines of credit onto a credit card.

Are lines of credit reported as revolving credit?

Yes, they are reported as revolving credit on your credit report.

Rudri Patel contributed to the reporting for this article.

Photo Credit: iStock/Getty Images