When you need to borrow money, you may have a choice to make: line of credit vs. credit card. But what’s the difference and which one is better? Here, we’ll walk you through your options.
What is a line of credit?
A line of credit allows you to access money when you need it. It’s not exactly the same thing as a loan, because when you take out a loan, you borrow a specific amount from the start. When you get a line of credit, you get access to a sum of money you can borrow against as needed. And generally, you can borrow that money for any reason.
Say you qualify for a $10,000 line of credit. You may not borrow that entire $10,000. Rather, you may decide you only need to borrow $6,000. In that case, you wouldn’t be charged interest on the remaining $4,000.
There are different ways to secure a credit line. One option is via a home equity line of credit, or HELOC. This option is available to property owners with enough home equity. It’s also possible to apply for a line of credit through your bank.
What is a credit card?
A credit card is a financial tool that allows you to borrow money as needed by acting as a payment option for you. When you charge an expense on a credit card, you don’t need to fork over the cash right away. Instead, you simply pay your credit card bill every month. If you can’t pay your credit card bill in full, you can make your minimum monthly payment instead. Doing so will cause you to rack up some interest on your balance, but it won’t harm your credit score.
A credit card actually gives you a line of revolving credit, because you get a spending limit you can charge against (that amount can change over time). That credit limit is based on factors like your credit score and income. Unsurprisingly, the average credit card limit varies when looking at different age groups.
What are the benefits of a line of credit?
When you need to borrow money, a line of credit can be a good choice for these reasons:
- Affordability. With a credit line, you’ll often get a lower interest rate than you will with a credit card.
- Easy to qualify. If you’re getting a HELOC, a lender will base its decision largely on the equity you have in your home, which …….