Credit Card & Line of Credit: Definition & Differences

Using credit cards to accommodate your day-to-day expenses has been the trend for quite some time now. And why shouldn’t it be? It is available for everyone, it doesn’t charge interest and you often get discounts or cash back or both at the same time!

Lines of credit are comparatively newer than credit cards. With this, you may not get cashback or discounts, but it comes in handy when you don’t know exactly how much amount you would need while borrowing.

Let’s learn in-depth about credit cards and lines of credit and the differences between the two.

What Is a Credit Card?

A credit card is a revolving line of loan which allows you to borrow a limited amount of money. Once you pay it back, your credit amount gets readjusted and you can start borrowing again without applying for a loan. 

There is a credit limit for every credit card beyond which you can’t borrow. This credit limit varies from borrower to borrower depending on the borrower’s debt repayment capacity.

Features of a Credit Card

A few features of credit cards are discussed below.

  • Most credit cards are generally unsecured financing options as the borrower doesn’t need to pledge collateral to avail it. Note that some lenders might ask for a security deposit for first-time users or people with poor credit scores.
  • Most credit card transactions don’t charge interest unless you delay your repayment. If you pay a part of the amount, the lender will charge interest on the remaining amount. Your new purchases will also be charged with interest in such a case.
  • The billing cycle for credit cards is 28 to 31 days, depending on the duration of the month, weekends, and holidays. The prior balance and new transactions are combined at the end of each billing cycle to establish your statement balance, and you’ll get a bill that is due roughly 21 to 25 days later. This means that the time between making a transaction and having to pay the bill might be anything between 49 to 56 days.

What Is a Line of Credit?

A flexible loan from a bank or other financial institution is known as a line of credit. A line of credit is a predetermined sum of money that you can access as needed and use in any way you like. It works similarly to a credit card with a fixed credit limit.

Features of a Line of Credit

A few features of lines of credit are discussed below:

  • While using this facility, you can take out the amount you need for expenditure and the rate of interest will be calculated only on that amount.
  • The rate of interest varies and can also be customised according to the borrower’s repayment capacity.

Differences between a Credit Card and a Line of Credit

The differences between a credit card and a line of credit based on different parameters are discussed below: 

ParametersCredit CardLine of Credit
Rate of InterestGenerally, the rate of interest here is much higher than that of a line of credit. The rate of interest is fixed.The rate of interest is much lower here than that of credit cards. The rate of interest can be customised according to the borrower’s ease of repayment.
EligibilityOften, borrowers with a low CIBIL score can also get credit cards.You need to have an existing relationship with a bank and a good CIBIL score.
Rewards or PerksYou can get cashback or discounts depending on the type of card and the chosen lender.You enjoy no such facilities here.
Purpose of useIt is best to be used for everyday expenses.It is best to be used for expensive purchases or for expenditures that cannot be estimated.
Calculation of InterestInterest is only charged if you fail to pay back the credited amount in time.Interest is charged only on the amount you borrow. 
Withdrawing RulesMost credit cards don’t allow cash withdrawals or charge a huge fee for it.Cash can be withdrawn up to the credit limit.
Borrowing LimitThe borrowing limit is smaller in comparison to lines of credit as the amount needs to be repaid roughly within less than two months.The borrowing limit is much higher here as the tenure of the loan is higher.
Grace PeriodThere is a grace period of 21-25 days to repay the amount.There is no such grace period.

Credit Line or Line of Credit – Which One to Choose?

When choosing between lines of credit or credit cards, you should be very sure of the amount and purpose of the loan. If you want to finance your daily expenses, and also want offers and cashback, a credit card should be your go-to option. 

In case you are not sure about the amount you want to loan, and for how long you would need it, it’s better to go for a line of credit.

Frequently Asked Questions

Q1. Are lines of credit available for individuals too?

Ans. Yes, lines of credit are now available for individuals too. These are generally referred to as personal lines of credit.

Q2. Which one is the easiest to get – a credit card or a line of credit?

Ans. Credit cards are the easiest to get as the credit limits are small here, and it doesn’t require collateral or other documents. You can often see credit issuing companies offering credit cards with a pre-approved limit. 

Q3. Is there a downside to a line of credit?

Ans. You may not use the line of credit but still, you have to pay to keep it open. Since the rate of interest here is flexible, you may have to pay a higher rate of interest if the market rate of interest increases when you wish to withdraw.

Q4. Does applying for a line of credit affect your credit score?

Ans. A hard inquiry, often known as a credit check, is typically required when applying for a line of credit and may slightly lower your credit score.  Same is applicable for credit cards as well.

However, if you manage the line of credit account correctly, higher credit availability and timely repayment could eventually raise your score.

Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 4+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.

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