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

Lines of credit and credit cards often cause confusion due to their shared characteristic of providing revolving access to funds. While both offer flexibility in borrowing, they are designed for different financial needs and operate with varying structures.

Understanding Lines of Credit

A line of credit (LOC) functions as a flexible, revolving credit facility offered by financial institutions, allowing borrowers to access funds up to a predetermined limit. Interest is only charged on the specific amount drawn, not the entire available credit limit.

Lines of credit commonly feature variable interest rates, meaning the rate can fluctuate based on market conditions. Common types include personal lines of credit, which are often unsecured, and home equity lines of credit (HELOCs), which are secured by the borrower’s home equity. Business lines of credit also exist, supporting short-term business needs and cash flow management, and can be either secured or unsecured.

Funds from a line of credit can typically be accessed through various methods, such as direct transfers to a bank account, writing special checks, or sometimes using a dedicated access card. Many lines of credit, particularly HELOCs, operate with a “draw period” where funds can be accessed, often lasting for 5 to 10 years, and a subsequent “repayment period” where no new funds can be drawn, and principal and interest payments are required. During the draw period, borrowers often only pay interest on the amount used, with principal repayment beginning in the later phase.

Understanding Credit Cards

A credit card provides a form of revolving credit that allows consumers to make purchases up to a specified credit limit. Interest is charged on any outstanding balance carried beyond the grace period, if applicable.

Credit cards are typically unsecured, though secured credit cards exist for individuals building or rebuilding credit. Funds are accessed primarily by swiping, tapping, or entering card details at points of sale, both in physical stores and online. Cash advances are also possible, though they usually incur higher fees and immediate interest charges.

Credit cards operate on a billing cycle, typically a month long, after which a statement is issued detailing transactions and the minimum payment due. Many cards offer rewards programs, such as cashback or points, and some may have introductory Annual Percentage Rates (APRs) or annual fees. The interest rates on credit cards can vary significantly, often ranging from approximately 15% to over 30% per year, depending on the card and the borrower’s creditworthiness.

Shared Characteristics of Lines of Credit and Credit Cards

Lines of credit and credit cards share fundamental characteristics that can lead to their occasional confusion. Both financial products represent forms of revolving credit, allowing borrowers to access funds, repay them, and then re-borrow up to an established credit limit.

In both cases, interest is generally charged only on the amount of money actually borrowed or the outstanding balance, rather than the entire available credit limit. Lenders set a credit limit for both products, which is the maximum amount that can be borrowed. Furthermore, the responsible use and timely repayment behavior for both lines of credit and credit cards can significantly influence an individual’s credit score.

Distinguishing Lines of Credit from Credit Cards

While lines of credit and credit cards share some structural similarities, their primary purposes and operational mechanisms differ substantially. Credit cards are typically used for routine, smaller transactions and everyday purchases, providing a convenient payment method for consumers. In contrast, lines of credit are often intended for larger, more specific financial needs, such as funding home renovations, managing unexpected expenses, or consolidating higher-interest debt.

Credit cards facilitate transactions directly through a physical card or card number for point-of-sale and online purchases. Lines of credit, however, typically require funds to be transferred to a linked bank account, or accessed via checks, rather than direct card-based transactions.

Interest rates are another key differentiator. Lines of credit frequently offer lower, often variable, interest rates compared to the generally higher rates found on credit cards. While credit card interest rates can range broadly, lines of credit, particularly secured ones, tend to have more favorable rates due to the lower risk for lenders.

Regarding fees, credit cards commonly involve annual fees, foreign transaction fees, and cash advance fees. Lines of credit may have origination fees or annual maintenance fees, but they generally incur fewer transaction-specific fees than credit cards. Credit limits also tend to differ, with lines of credit, especially secured options like HELOCs, often providing significantly higher borrowing capacities than most credit cards.

The repayment structure also presents a notable distinction. Credit cards require a minimum monthly payment, but offer a grace period during which no interest is charged if the full balance is paid. Lines of credit typically begin accruing interest immediately upon drawing funds, and while they also require minimum payments, some, like HELOCs, may allow interest-only payments during a draw period before a principal repayment phase begins. Finally, security is a major difference; most credit cards are unsecured, relying on the borrower’s creditworthiness, whereas lines of credit can be either unsecured or secured by collateral, such as real estate in the case of a HELOC.