Personal line of credit vs. credit card

Personal lines of credit and credit cards both offer a flexible way to borrow money. And both are considered revolving credit. But there are key differences in how each one operates.

If you’re trying to compare lines of credit and credit cards, here are some more things to know.

Key takeaways

• Personal lines of credit and credit cards are both types of revolving credit.
• Depending on your situation and what you plan on using it for, either a line of credit or a credit card may be a good option.
• Lines of credit and credit cards may have different interest rates, credit requirements, fees and more.
• With responsible use, lines of credit and credit cards may help build credit.

Lines of credit—sometimes referred to as credit lines—function similarly to credit cards, according to the Consumer Financial Protection Bureau (CFPB). When you open a line of credit, the lender gives you access to a set amount of money called a credit limit. 

There are several types of lines of credit. Some, such as business lines of credit and home equity lines of credit, have specific uses. Others, like personal lines of credit, tend to be for general purposes. There are also government-backed lines of credit that function in their own ways. 

The CFPB says that to use a personal line of credit, you use special checks or bank transfers to move money into your checking account, unlike credit cards. Making withdrawals at a branch or through a mobile app may also be possible.

The CFPB also says many banks and credit unions require you to have a checking account with them in order to secure a line of credit. The withdrawal methods may be one reason why.

As you use funds, the amount of available credit you have goes down. Any interest or fees could also affect your available credit. But as you pay back what you owe, your available credit goes back up. The CFPB also says you can expect monthly bills and minimum payments based on what you spend.

Most personal lines of credit are good for only a certain amount of time. And the CFPB warns that you could be charged a fee each time you use the account.

Secured vs. unsecured credit lines

Personal lines of credit are unsecured, the CFPB says, which means you don’t need to provide collateral to open an account. But because the application process relies on judging creditworthiness, the agency says they may require a good credit score to be approved.

Unsecured credit lines are different from secured lines of credit, such as a home equity line of credit. Sometimes referred to as HELOC for short, these loans generally allow people to borrow against the value of their home.

Secured lines of credit may come with lower interest rates because there’s less risk to the lender. But the terms can have additional rules and restrictions. And failing to repay what’s been borrowed could mean losing your collateral. In the case of a HELOC, that means the home itself.

Credit cards are available from many banks and credit unions. When you apply for a credit card, the credit card issuer judges your credit to determine whether to extend a credit line, according to the CFPB. As part of the process, lenders may also factor in creditworthiness to decide on things like credit limits and interest rates.

If approved, you’ll receive a credit card you can use to make purchases. At the end of each month’s billing cycle, you’ll receive a statement that shows information like how you used the card, your minimum payment for that month and what you owe in total. 

Minimum payments are usually calculated based on your monthly balance. A minimum payment might be a percentage of the card’s balance plus new interest and late fees. Or it could be a flat percentage of the entire balance. And minimum payments might also include past-due amounts. 

As you pay back what you’ve spent and other fees or charges, your available credit is restored. According to the CFPB, if you pay your bill in full before the due date each month, you may be able to avoid paying interest on purchases. Make sure to check your card’s terms and conditions to see whether your card has a grace period for purchases.

Types of credit cards

Many types of credit cards come with rewards programs. Programs can vary with each card, but many let you earn cash back, points or miles rewards. You can redeem them for a variety of things, depending on the card. Keep in mind, some credit cards may also charge annual fees. 

If you have less-than-perfect credit, a secured credit card might be another type of credit card to consider. When used responsibly, you can help yourself build credit with one. Responsible use means doing things like paying your bill on time each month. A secured card might also be a good stepping stone to a traditional unsecured card. 

Credit cards may be more familiar to you than personal lines of credit are. But exploring some key differences might help you decide if one is a better fit for your situation. Getting advice from a financial expert could also be beneficial.

Similarities between lines of credit and credit cards

As described above, personal lines of credit and credit cards function similarly because they’re both forms of revolving credit. When used responsibly, by doing things like paying your bills on time and using only the credit you need, you may be able to build your credit.

They both also feature monthly payments to pay down what’s borrowed. And there could be additional interest charges or fees, depending on the card or loan agreement. But with a credit card, you may be able to avoid paying interest on purchases if you pay off your full statement each month. 

Differences between lines of credit and credit cards

One of the biggest differences between personal lines of credit and credit cards is how available funds are accessed or used. Lines of credit may require special checks or transfers. When it comes to credit cards, you’re probably familiar with the plastic or metal cards that fit into a wallet. But some credit cards also offer technology such as virtual card numbers and contactless payments.

If you’re trying to access cash, a personal line of credit may help you avoid additional charges for cash advances. But there may be other fees to use the account. And remember, personal lines of credit may expire at some point. So the ability to get cash may not always be there in case of an emergency. 

When it comes to one type of revolving credit being better than the other, there isn’t a definitive answer. Benefits and loan terms, including interest rates, on a personal line of credit or a credit card can vary. And they might depend on the lender and things like an applicant’s income, debt, credit scores and more.

If you’re considering either option, doing some research might help you decide what’s best for your situation.

Personal lines of credit and credit cards both offer a flexible way to borrow money. Comparing the interest rates, fees and repayment terms of any agreement could help you make the best decision when deciding on a borrowing option.

No matter which option you choose, make sure you’re applying for something that’s right for your situation. And don’t forget that getting expert financial advice could also be helpful. 

Think a credit card might be right for you? With pre-approval from Capital One, you can find out if you’re eligible for credit cards before you apply. It’s quick and won’t hurt your credit score.