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Personal Line of Credit vs. Credit Card: Which Is Better?

Personal Line of Credit vs Credit Card - Which Is Better?
Kelly Boyer Sagert
Kelly Boyer SagertUpdated March 2, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
If you’re looking to make purchases using revolving credit, using a credit card may be most familiar to you. However, another way to borrow money as needed is with a personal line of credit.While these two types of credit both offer a way to borrow funds, there are key differences between personal lines of credit vs. credit cards, including when it comes to application requirements, credit terms and limits, rewards, and more. We’ll explore these differences in this post so you can determine which might be better for you.

What Is a Personal Line of Credit?

A personal line of credit is a type of unsecured loan, meaning you don’t need to put up any collateral to secure it. It’s also a revolving loan, which allows you to draw from it up to your credit limit, as needed, and pay it back with interest. Interest rates on personal lines of credit are variable and tend to be lower than rates on credit cards.

How Does a Personal Line of Credit Work?

You can apply for a personal line of credit at a financial institution that offers them, such as a bank or credit union. Once approved for the personal line of credit, you would have access to a certain amount of funds that you could use as you see fit, up to the line of credit’s limit. Basically, it’s similar to a business line of credit, but designed for individuals.To access the funds, you can go to a branch of the financial institution that approved the loan if it has brick-and-mortar locations. Depending on the lender, you may be able to access your funds online, perhaps through a mobile app. You also may get checks or a bank card to use. Interest typically begins to accrue as soon as you use any funds.Payment amounts would be based on the current outstanding balance, plus interest. You can continue to use funds up to the line of credit’s limit and repay them with interest during the designated term of the loan. If desired, it’s typically possible to reapply for another personal line of credit after the initial one expires.

What Is a Credit Card?

A credit card is a rectangular piece of plastic (or metal) that represents a revolving line of credit. A credit card allows you to borrow funds up to your designated credit limit by swiping or inserting the card, or by entering your card’s number, expiration date, and security code.You’ll then pay back the amount used, plus interest, and continue to draw on the account as needed. Interest rates on credit cards are based on your creditworthiness, and tend to be higher compared to those of other borrowing options, like a personal line of credit. 

How Does a Credit Card Work?

Here’s how credit cards work: After you’ve made a purchase with your credit card (in person or online), it’s posted to your account. Each month, you’ll receive a bill from the card issuer detailing your transactions, the card’s outstanding balance, the minimum payment due, and the payment due date. Credit card accounts usually come with a grace period. This allows you to pay off your balance within a specific time frame (say, 21 to 30 days) between the end of the billing cycle and your payment due date without incurring interest charges. If you pay your balance in full each month, you typically won’t owe interest.

Personal Line of Credit vs. Credit Card: What Are the Differences?

Personal lines of credit and credit cards are both forms of revolving credit that allow you to borrow up to your credit limit as needed. However, there are key differences when it comes to a personal line of credit vs credit card to know if you’re choosing between the two.

Access and Rewards

Credit cards are easy to use, whether you’re presenting one to a retailer or entering your credit card information during the online checkout process. On the other hand, access to a personal line of credit may require an app, checks, or a bank card, or you may need to go to the financial institution issuing the loan to access the funds.As far as rewards, many credit cards offer them, whether in the form of points or other cash-back rewards. Personal lines of credit, on the other hand, generally don’t offer rewards or other perks. This could be a critical consideration when choosing between a business line of credit or credit card, or a personal line of credit.

Credit Terms and Limits

In general, a personal line of credit has two stages, with each usually lasting three to five years. First, there is a draw period in which a person can borrow up to the credit limit as needed, and then repay the borrowed funds according to the agreement. Then there can be a repayment term, where the borrower can’t take out any more funds and is simply repaying any outstanding balance. Credit card accounts, meanwhile, come with expiration dates rather than terms (although they can essentially be the same thing). The month and year that a credit card expires is imprinted on the physical card (e.g., 12/26). After that date, the physical card is no longer able to be used. However, as long as the account is in good standing, the issuer will typically provide a new card with the next expiration date. Credit card accounts can be closed by either the card holder or the issuer with any outstanding balance still owed.When it comes to credit limits, terms will vary widely by lender, but, in general, limits tend to be higher for personal lines of credit than they are for credit cards. Credit limits for personal lines can range from $30,000 or $50,000 or even more. On the other hand, the average credit card credit limit in 2020 was $30,365, although, again, this can vary significantly depending on a person’s creditworthiness.

Application Requirements

You can generally apply for credit online, over the phone, in person at a financial institution, or by mailing in an application.With a credit card application, information requested will likely include your name, address, phone, date of birth, and Social Security number, as well as information related to your income, expenses, and bank account balances. Credit scores matter when applying for a credit card, and those with good scores typically have more options to consider and greater odds of approval. Once your application is approved, you’ll receive a credit card in the mail that you can begin using.For a personal line of credit application, lenders will likely gather your personal and/or demographical information. You may be required to provide documentation proving your income when applying for a personal line of credit, which can make the application process a bit more involved (though for businesses, there is such a thing as a no doc business line of credit). The lender will also take a close look at your credit history and score for a personal line of credit, since your history of repayment is reassurance that you’ll pay back a loan despite the lack of collateral. However, requirements may be less stringent for unsecured lines of credit, including unsecured business lines of credit.

How They Affect Credit Score

Credit bureaus typically consider personal lines of credit and credit cards as revolving forms of credit, so they’re treated in similar ways. With revolving credit, you can spend borrowed money, repay it, and spend again up to your limit throughout the designated term.You can boost or maintain good credit with a revolving line of credit by:
  • Making payments on time.
  • Keeping your total credit utilization under 30%.
  • Maintaining your personal line of credit and credit cards as long-standing accounts to increase the length of your credit history.
Having a good credit mix can help, too. This means having a mix of revolving types of credit, such as personal lines of credit, credit cards or, for a business, a commercial equity line of credit, as well as installment loans, including various types of personal loansHowever, there’s no need to take on additional forms of debt just to try to improve this factor of your credit score. Still, if you’re making a choice, it’s worth thinking about whether personal loans or credit cards would be the right solution for you.

The Takeaway

Personal lines of credit and credit cards are both types of revolving credit that can allow you to borrow money as needed and then pay it back, plus interest. However, there are some key differences between personal lines of credit vs. credit cards to keep in mind. For starters, credit cards offer a grace period and rewards, whereas personal lines of credit do not. Further, credit limits tend to have higher credit limits and lower interest rates, which can make them worth considering for larger purchases as opposed to everyday spending. Whereas you can easily swipe or enter your credit card information, you may need to go to a branch or use an app or check to access funds from your personal line of credit.If neither option seems quite right for your situation, another category of borrowing you could consider are personal loans. These loans allow you to access a lump sum of money, which you then pay back in regular installments. If you’re interested in exploring personal loans, Lantern by SoFi can help.
Photo credit: iStock/Anchiy
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC0122073

Frequently Asked Questions

How long does it take to get a credit card?
Is it bad to pay your credit card as soon as you use it?
Does a line of credit need to be paid back?

About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
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