Is a Line of Credit Better Than a Credit Card?

Financial tools like lines of credit and credit cards provide flexible borrowing options for consumers. Both are forms of revolving credit, allowing individuals to access funds up to a predetermined limit, repay what they borrow, and then borrow again as needed. This article will clarify their distinct roles in personal finance.

What is a Line of Credit

A line of credit (LOC) functions as a flexible loan from a financial institution, providing access to funds up to a specific maximum amount. Unlike a traditional loan that disburses a lump sum upfront, an LOC allows a borrower to draw money as required. Interest is charged only on the amount actually borrowed, not on the entire credit limit. As borrowed funds are repaid, that portion of the credit becomes available again for future use.

Interest rates on lines of credit are often variable, meaning they can fluctuate with a benchmark rate, such as the prime rate. Borrowers can access funds from an LOC through various methods, including direct transfers to a checking account, special checks, or through an ATM. Repayment involves making minimum payments, which typically cover both principal and interest, though some may require interest-only payments during a draw period. Lines of credit can be secured, requiring collateral like a home (Home Equity Line of Credit or HELOC), or unsecured.

What is a Credit Card

A credit card serves as a payment tool issued by financial institutions, enabling cardholders to pay for goods and services based on a promise to repay. Available funds replenish as balances are paid down. Credit cards are primarily used for point-of-sale transactions, whether in person or online.

Interest is charged on outstanding balances if the full amount is not paid by the due date, often after a grace period for new purchases. While some cards offer introductory 0% Annual Percentage Rate (APR) periods, standard interest rates on credit cards can be high, with average APRs ranging from about 20% to 24% as of August 2025 for accounts assessed interest. Minimum payments are required, calculated based on the outstanding balance, and paying only the minimum can lead to extended repayment periods and increased interest costs. Many credit cards also offer rewards programs, such as cashback or points, and may include benefits like purchase protection. Common fees include annual fees, late payment fees, and cash advance fees.

Comparing Lines of Credit and Credit Cards

Lines of credit and credit cards both offer revolving credit, but they differ significantly in their intended purpose and how funds are accessed. Credit cards are designed for everyday spending and smaller, frequent transactions, often used at the point of sale. In contrast, lines of credit are better suited for larger, less frequent expenses, or for managing cash flow fluctuations, where direct access to funds in a bank account is beneficial.

Interest rates often present a distinction; lines of credit typically have lower interest rates compared to credit cards, particularly unsecured lines of credit. While credit card interest rates can average above 20% APR, unsecured lines of credit might range from approximately 11.50% to 21.50% APR. Repayment structures also vary; credit cards usually require a minimum payment that includes interest, while some lines of credit may allow interest-only payments during a specific draw period.

Credit limits can differ, with lines of credit often offering higher credit limits than typical credit cards, providing greater access to capital for substantial needs. Fees are also a point of contrast; credit cards frequently come with annual fees, foreign transaction fees, and cash advance fees. Lines of credit may have annual fees. Both financial products can impact credit scores positively through responsible use, such as timely payments and managing credit utilization. However, credit cards commonly feature rewards programs and consumer protections that are absent from lines of credit.

When to Use Each Option

Choosing between a line of credit and a credit card depends on the specific financial need and repayment strategy. A line of credit is advantageous for larger, planned expenses, or for situations requiring flexible access to a significant amount of cash over time. For instance, it can be suitable for home renovations, consolidating higher-interest debt, funding a small business, or serving as an emergency fund for unpredictable, substantial costs. The potentially lower interest rates and direct access to funds make LOCs a practical choice for these scenarios.

Credit cards, conversely, are well-suited for everyday purchases, online shopping, and short-term borrowing that can be repaid quickly. They are useful for building credit history through consistent, on-time payments, and for earning rewards like cashback or travel points. Many credit cards also offer consumer protections against fraud, which can be valuable for daily transactions. When considering either option, it is important to evaluate the amount of money needed, the intended repayment timeline, sensitivity to interest rate fluctuations, and one’s overall creditworthiness and financial discipline.