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The Difference Between a Personal Line of Credit and a Credit Card

Credit cards may come with more perks and rewards, but they have higher interest rates, too.

Steven Puetzer / Getty Images

Credit cards and personal lines of credit are two common options for consumers looking to borrow money without pledging a hard asset, such as a home or car, as collateral. Although credit cards and lines of credit have a lot in common, there are some big differences -- including fees, interest rates and even how long you’ll have access to the funds. 

Here’s how to compare these two credit options to determine which one is best for you. 

What is a line of credit?

“A line of credit is a set amount of money made available to a borrower by a financial institution or lender,” said Michael Hammelburger, certified financial adviser and CEO of The Bottom Line Group. “It functions similarly to a revolving loan in that you can borrow from the line of credit, repay the amount and then borrow again up to the approved limit.”

Even if you request a large sum from a lender, you’ll only pay interest on the amount of money you draw -- not how much you’re approved for. And depending on the type of line of credit and the rules set by the lender, you may have a pretty flexible time frame to repay the funds. You’ll have regular access to the money within a specified window, which makes it a good choice if you’re renovating your home over a few years.

“A really common line of credit is a home equity line of credit,” said Ryan Bannister, certified public accountant and owner of 1Up Financial Advisors. “This is tied to the equity you’ve built in a property, so the credit limit is generally 80% of your total equity.” For example, if your house is worth $300,000 and you owe $200,000 on it, your hypothetical HELOC may be 80% of your $100,000 equity, or $80,000, he said. 

The draw period on a line of credit is the amount of time you have to borrow: For instance, if you have a five-year draw period, you can withdraw funds anytime up to five years. Depending on your bank, you may be able to transfer money from your line of credit to a checking account, withdraw cash, use a debit card and write checks. Once five years is up, you’ll have to apply for a new line of credit.

Opening a line of credit comes with a handful of fees, including an application fee, annual fee and closing costs. Though some lenders may waive closing costs, you’ll usually have to meet certain conditions, such as maintaining the account for a set amount of time. And any money you borrow from the line of credit will accrue interest until it’s paid off. 

What is a credit card?

You can use a credit card to make everyday purchases -- big or small -- as long as they’re within your credit limit. People use credit cards at the grocery store, on vacation, dinner or anywhere the credit card issuer is accepted. A credit card can come in handy if you want to earn rewards on purchases, and it can also be a good tool for building or repairing credit. 

When you use your credit card, you’ll reduce the available credit by the purchase amount. It’s important to only spend what you can afford to pay back in full and on time -- if you don’t pay your entire statement balance by the due date, you’ll be charged interest on the remainder. Though interest rates vary, the average credit card rate is currently above 20%, which can add up quickly. And depending on the credit card, you may be charged other fees, such as an annual fee or cash advance fee, if you need a lump sum of money from your credit limit. 

Read more: Credit Card Pros and Cons: What to Know

The similarities between a line of credit and a credit card

The process for both types of financing starts with an application, where you’ll provide information about your assets, income and debt. As with all financing applications, the lender will also request and factor in your credit report. Here are a few other similarities: 

  • You’ll have a predetermined credit limit, which is a set amount you’re able to borrow from. 
  • Your credit score, credit history and credit utilization will all play a role and be affected. 
  • You can use the funds for large purchases or emergencies quickly. 
  • You’ll have several options for borrowing -- including secured credit that uses collateral to back the line of credit, and unsecured credit that doesn’t require collateral. And you can choose from many banks that usually offer both. 

When should you choose a line of credit?

A line of credit may be the best option for individuals and families looking to borrow a larger sum of money than a credit card and who want the flexibility of paying the balance back over time. A line of credit offers liquidity to take on major expenses as they come, such as an open-ended remodeling project or quarterly college tuition payments for a child.

“I like people to have a line of credit in place to have them as a tool in their pocket,” said Jason Krueger, a financial planner with Ameriprise Financial. “It’s just a nice way to have instant access to funds in the event of an emergency or an opportunity.”

When should you choose a credit card?

If you want to make everyday purchases, a credit card may be used to earn rewards or add a layer of fraud protection to an online transaction. Because many credit cards offer no annual fees, they can be a less expensive way to finance purchases than a line of credit. You can avoid interest by paying your bill on time and in full each month, or you can opt for a 0% APR credit card if you need more time to pay off your balance without having to pay interest for an introductory period. 

What sets a line of credit and a credit card apart?

A line of credit and a credit card both let you access funds freely whenever you need them, but a big difference is how long you’ll have access to the money. Here are other distinctions between the two: 

Interest rate 

The main difference is the interest rate, said Bannister. “A line of credit generally comes with a lower interest rate than a credit card. For instance, the average HELOC rate is 8.14%. But the catch is that it’s a little more strenuous to apply and qualify for a line of credit.” 

And even though you can take out a cash advance on a credit card, its hefty fees and interest rates make it more costly than a line of credit. 

One-time purchase vs. everyday spending

A line of credit is typically reserved for borrowing for a large purchase, such as a home or car. A credit card is a revolving line of credit that you can use for almost any purchase within your credit limit where your card is accepted, For instance, you can use the card for home renovations and groceries, as well as online shopping. 

Rewards

If you’re looking to earn cash back or points on your purchase, you’re better off with a credit card. “The benefit of credit cards that lines of credit generally don’t have is rewards,” said Bannister. Still, credit cards typically have a higher variable interest rate than a line of credit. So if you don’t pay your balance in full and on time each month, you’ll accumulate interest, which can offset any rewards you’ve earned. 

Time frame 

Choosing between a line of credit or credit card will depend on how long you’ll need to access the credit. You’ll usually want to leave your credit card open, even if you’re not using it much, since it’s part of your credit history. Having multiple credit card accounts can also help boost your credit utilization ratio (which lenders look at to evaluate how much credit you’re using and how well you manage debt). However, some people do choose to close a credit card if the risks outweigh the benefits. 

On the other hand, a line of credit lets you withdraw money over a defined amount of time, up to a preset maximum. It’s best to make monthly payments since interest accrues, but you may have 10 to 15 years to pay back the funds, depending on your lender.  

Credit cardPersonal line of credit
Type of creditRevolvingRevolving
Repayment periodMonthly, otherwise interest accruesDepends; some can be open indefinitely
Interest rateVariableVariable
Maximum amountLargely depends on your credit score and card issuer$1,000 – $100,000
Qualification requirementsDepends on the credit card you’re applying forGreat credit score, verification of income and assets and a low debt-to-income ratio
FeesDepending on the institution, you may pay:
Annual fee
Interest fees
Late fees
Depending on the institution, you may pay: Application fees
Annual fee
Fees for going over your credit limit
FundingDrawn from as neededDrawn from as needed
What it’s best forEveryday spending and major purchases, like groceries, travel or car maintenance Open-ended projects, like ongoing home remodeling
Recurring purchases, like college payments and emergency charges

The bottom line

Regardless of which borrowing option you choose, it’s wise to use your credit responsibly, said Bannister. By practicing good credit habits, like paying your balance on time, you’ll avoid additional interest charges and maintain a solid credit score. You should also keep your credit utilization ratio (the percentage of the total available credit that you’re actually using) below 30% to seem less risky to lenders.

 

Most importantly, always read the fine print before applying for any credit card or line of credit. Pay attention to any fees and penalties that can impact your financing and credit options in the long run.

Editors’ note: An earlier version of this article was assisted by an AI engine. This version has been substantially updated by a staff writer.

This article includes some material that was previously published on NextAdvisor, a CNET Money sister site that was also owned by Red Ventures and which has merged with CNET Money. It has been edited and updated by CNET Money editors.

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Dashia is a staff writer for CNET Money who covers all angles of personal finance, including credit cards and banking. From reviews to news coverage, she aims to help readers make more informed decisions about their money. Dashia was previously a staff writer at NextAdvisor, where she covered credit cards, taxes, banking B2B payments. She has also written about safety, home automation, technology and fintech.