What Is a Line of Credit vs. Credit Card?

Lines of credit and credit cards both offer access to borrowed funds. While both provide revolving credit, allowing funds to become available again as they are repaid, their structures, applications, and how funds are accessed vary significantly.

Understanding Lines of Credit

A line of credit (LOC) functions as a flexible loan arrangement between a financial institution and a borrower, allowing access to funds up to a predetermined maximum amount. The borrower can draw on these funds as needed, repay them, and then draw again, as long as they do not exceed the established credit limit. Interest is typically calculated only on the amount of money actually drawn, not on the entire available credit limit.

Funds from a line of credit can be accessed through various methods, such as direct transfers to a checking account, writing special checks provided by the lender, or using a linked debit card. This flexibility in accessing funds makes LOCs suitable for managing irregular expenses or bridging temporary cash flow gaps. The repayment structure for a line of credit often involves minimum monthly payments that include accrued interest and a portion of the principal.

Common types of lines of credit include personal lines of credit, which are often unsecured and used for general financial needs, and home equity lines of credit (HELOCs), which are secured by the equity in a homeowner’s property. Business lines of credit provide similar flexibility for companies to manage operational expenses or seize opportunities. Interest rates on lines of credit are frequently variable.

Understanding Credit Cards

A credit card provides a convenient method of payment for purchases, allowing cardholders to buy goods and services up to an assigned credit limit without immediately using their own cash. When a purchase is made, the amount is added to the card’s outstanding balance. Financial institutions establish a billing cycle, after which a statement is issued detailing transactions and the total amount due.

Credit cards often include a grace period, allowing cardholders to pay their entire balance without incurring interest charges. If the full balance is not paid by the due date, interest begins to accrue on the outstanding amount, usually at a fixed annual percentage rate (APR). Minimum payments are required by the due date, but only paying the minimum will result in interest charges on the remaining balance.

Credit cards can also be used for cash advances, though these transactions typically incur higher interest rates and immediate interest accrual. Various fees can be associated with credit cards, including annual fees for premium cards, late payment fees, and foreign transaction fees. Responsible credit card use, including timely payments and low balances, can positively influence credit history and scores.

Core Distinctions and Common Uses

The primary distinction between a line of credit and a credit card lies in how funds are typically accessed and their intended uses. Lines of credit generally allow direct access to funds, making them suitable for larger, more flexible financial needs like home renovations or consolidating debt. Credit cards, by contrast, are designed for point-of-sale transactions, providing immediate payment for everyday purchases or smaller, unexpected expenses.

Repayment structures also differ, with lines of credit often offering more flexible minimum payment requirements that can vary based on the drawn amount. Credit cards typically require a minimum payment that is a percentage of the outstanding balance or a fixed dollar amount, often leading to slower principal reduction if only the minimum is paid.

Interest rates for lines of credit are frequently variable and can be lower than those found on credit cards. Credit card interest rates are often fixed for purchases, though they can be quite high, especially for cash advances. The interest on a line of credit usually applies only to the amount drawn, while credit card interest applies to the entire outstanding balance if not paid in full by the due date.

Regarding fees, lines of credit may have annual fees or draw fees, but they typically do not incur transaction-specific fees beyond interest. Credit cards commonly feature annual fees, late payment fees, over-limit fees, and foreign transaction fees. Both products impact credit profiles; timely payments build positive history, while high utilization negatively affects scores.