Is a Line of Credit the Same as a Credit Card?

Financial tools like credit cards and lines of credit offer access to borrowed funds, providing flexibility for various financial needs. While both serve as mechanisms for obtaining credit, they operate with distinct features and are typically used for different purposes. Understanding these differences is important for managing personal finances effectively and making informed decisions about borrowing. This article aims to clarify the nature of each tool, highlighting their individual workings and typical applications.

Understanding Credit Cards

A credit card provides a revolving line of credit issued by a financial institution, allowing individuals to borrow money up to a pre-set limit. When purchases are made, the outstanding balance accrues interest if not paid in full by the due date. Most credit cards offer a grace period, which is a period of around 21 to 25 days after the billing cycle closes during which no interest is charged on new purchases if the full balance is repaid. Consumers are typically required to make a minimum monthly payment, but paying only this amount can lead to significant interest charges over time.

Credit cards are widely accepted for everyday transactions, both online and in physical stores. They often come with rewards programs, such such as cash back, points, or travel miles, which incentivize spending. Furthermore, credit cards generally offer strong fraud protection, limiting a cardholder’s liability for unauthorized charges.

The annual percentage rate (APR) on credit cards can vary significantly, often ranging from approximately 15% to over 25%, depending on the card type and the cardholder’s creditworthiness. As of August 2025, average credit card APRs are around 24% to 25% for new cards. These rates are generally higher compared to other forms of credit due to the unsecured nature of the debt and the convenience offered.

Understanding Lines of Credit

A line of credit (LOC) is a flexible borrowing arrangement that allows an individual to access funds up to a specified maximum amount as needed. Unlike a traditional loan, which provides a lump sum upfront, an LOC permits repeated borrowing and repayment, with interest charged only on the amount actually drawn. This revolving nature means that as funds are repaid, the available credit replenishes.

Lines of credit come in various forms, with personal lines of credit and home equity lines of credit (HELOCs) being common examples. A personal line of credit is typically unsecured, meaning it does not require collateral, and interest rates can vary, often ranging from approximately 9% to 15% depending on the borrower’s credit profile. HELOCs, on the other hand, are secured by the equity in a home, offering generally lower interest rates because the collateral reduces the lender’s risk. As of August 2025, average HELOC rates are around 8.26%.

HELOCs usually feature two distinct phases: a draw period and a repayment period. During the draw period, which can last for 5 to 10 years, borrowers can access funds as needed and often make interest-only payments. Once the draw period ends, the repayment period begins, requiring principal and interest payments over a longer term, typically 10 to 20 years. Interest paid on HELOCs may be tax-deductible if the funds are used to buy, build, or substantially improve the home securing the line of credit.

Shared Characteristics

Credit cards and lines of credit share fundamental characteristics as financial instruments. Both provide access to revolving credit, meaning that funds can be borrowed, repaid, and then re-borrowed multiple times without needing a new application. Each type of credit facility comes with a pre-set credit limit, which represents the maximum amount of money that can be borrowed.

Interest accrues on any outstanding balance for both credit cards and lines of credit, and both products require minimum monthly payments to keep the account in good standing. While personal lines of credit are generally unsecured, similar to credit cards, home equity lines of credit are secured by an asset.

Distinguishing Features

The primary distinctions between credit cards and lines of credit lie in their typical uses, methods of accessing funds, interest rate structures, collateral requirements, and repayment nuances. Credit cards are designed for everyday transactions and smaller, routine expenses, often providing rewards for spending. They are accessed primarily through a physical card for point-of-sale purchases or online transactions. Lines of credit, particularly personal and home equity lines, are generally intended for larger, more substantial funding needs, such as home renovations, debt consolidation, or business expenses.

Access to funds also differs significantly; while credit cards rely on card-based transactions, funds from a line of credit are typically accessed through direct transfers to a bank account, checks, or online portals. This allows for larger, direct disbursements. Interest rates on credit cards tend to be considerably higher, often exceeding 20%, whereas lines of credit, especially secured HELOCs, usually offer lower variable rates, with personal lines of credit falling in between.

Collateral is another key differentiating factor. Credit cards are almost always unsecured, meaning no asset backs the debt, which contributes to their higher interest rates. Lines of credit can be either unsecured, like a personal line, or secured by an asset, such as a home in the case of a HELOC.

Both require minimum payments, but the typical usage patterns lead to different repayment behaviors. Credit cards are often paid in full monthly to avoid interest, while lines of credit may carry balances for longer periods, especially during a HELOC’s draw phase. The impact on a credit score is also influenced by how these tools are used; credit utilization, or the amount of credit used relative to the available limit, is a significant factor, with high utilization on either potentially affecting scores negatively.