LINE OF CREDIT vs. CREDIT CARD

If you are in the market for either a line of credit or a credit card, it is important that you understand the differences between the two. Educating yourself will help you select the option that is best for your needs. The most important aspects to consider are payback terms and interest rates.

Purpose
If you are applying for a credit line or applying for a credit card you will be required to submit an application with specific financial info. Your credit will also be analyzed in detail when determining if approval should be granted. Different bank and card issuers are going to have different credit criteria for their products.

Both credit cards and lines of credit can either be unsecured or secured. Secured credit cards and lines will require that you utilize some sort of collateral as a deposit (could be property or cash). Unsecured credit cards and lines of credit do not require any sort of collateral.

Features
Credit cards and lines of credit both offer revolving credit. This means that you can withdraw money or make purchases against the credit limit. Once you repay the amount you have used, the funds become again accessible.

Even though there are many similarities when comparing the two, lines of  credit and credit cards also have important dissimilarities.

Credit cards are pieces of plastic with magnetic strips that are scanned when purchases are made. While a line of credit likely has paper checks for you to use when you need access to money.

Advantages
Key differences are obvious when it comes to the advantages each offer. Since most merchants accept both MasterCard and Visa, users of credit cards reap the the benefit of not having to bring checks or cash with them when shopping. The main advantage to a line of credit is their interest rates. They are typically lower than those associated with credit cards.

Things to take into consideration
Many people use lines of credit instead of credit cards for their convenience of paying for items over a long period of time. Credit cards offer a 'grace period' during which users will not be charged interest. But if you do not pay your balance for that billing period, a fairly high interest rate will be applied to your balance. Consumers that know they will be paying for their purchase over months or years would prefer to pay lower interest rates over a longer timeframe as opposed to having a 20 day grace period with a high interest rate to follow.

Dangers
A line of credit that is secured will likely mean you are using your home as collateral. Therefore, if you do not pay your note, the bank will take possession of your home. Therefore, it is important that you understand how your line is going to work and what is expected of you prior to signing anything.

Similarly, credit cards have agreements more commonly known as the disclosure. You will need to read the disclosure carefully so that you understand how much interest rate you are going to be charged and what can happen that will equate to you receiving a higher interest rate.

Pros and Cons of a Line of Credit - Find out if a line of credit is the best option for your needs.
Secured Loans Guide
What is a Line of Credit?
Line of Credit vs. Lump Sum


 

 


 

 

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