When you need to purchase something but don’t have the cash to pay for it, what do you do – get a line of credit, or a credit card?
In many developed countries, the first answer seems to be “use a credit card”. In the US, 82% of adults have a credit card. In other countries, such as Canada, the share is even higher.
When it comes to borrowing money, credit cards present a paradox. They are easy to qualify for and even easier to use. But at the same time, most of them come with relatively high interest rates.
Using Federal Reserve data, CNN reported the average credit card interest rate in 2024 at 22.63%. Compared to most other forms of credit, that’s an incredibly high interest rate. If your credit score is average or better, you’ll get much better rates.
As an alternative to credit cards, a line of credit would be the next logical choice. So, in this article, we will compare credit cards and lines of credit against each other.
Credit Cards
Credit cards are one of the most popular forms of credit, but also one of the most costly if you miss payments.
As the most popular form of consumer credit, credit cards need little introduction. They are a form of revolving credit that tens of millions of people rely on to fill the day-to-day gaps in their personal finances. So, what do they offer?
1. Convenience
Credit cards are extremely convenient. They make it far easier to access credit than a line of credit does. This is especially evident in the moments before a purchase is made.
Think, for example, that you see something you want in a store that has a credit card machine. All you need to do is pull out your card and swipe it. Oftentimes, you don’t even need to enter a PIN anymore.
2. Grace Periods
With a credit card, you can make purchases on a daily basis. You repay on a monthly basis, and are thus given long periods between your necessary payments. This grace period doesn’t exist with a line of credit.
3. Rewards
Many credit cards, including those that don’t charge annual fees, offer rewards.
Two of the most common rewards are cash-back rewards and air miles. Both of these rewards offer the cardholder a way to redeem their repayments and save money in the future. You simply use your credit card as intended and receive your reward for doing so.
The obvious catch here is that you can only really benefit from rewards if you continuously pay your credit card balances on time and in full. If you never miss a payment, your credit card provider will end up paying you!
But missing a single payment can easily cost you far more than the rewards you get. This is why credit cards are so profitable for the companies that provide them. A single mistake on the cardholder’s part will cost the cardholder a lot.
Cash Back vs Travel Rewards Credit Cards: Which One is Better For You?→
Lines of Credit
A line of credit is another form of revolving credit.
You have a credit limit, and you only pay the account provider when you draw from the line of credit. In this way, a line of credit is a lot like a credit card. But there are a few major differences.
You can normally open a line of credit almost as easily as you can apply for a new credit card. It’s a standard financial product offered to consumers and businesses by almost all banks.
You can draw from a typical line of credit in one of a few ways:
- Write a check from your line of credit
- Use your debit card to withdraw from your line of credit at an ATM
- Use your line of credit account to pay for bills, or wherever else they’re applicable
- Use your online banking to transfer funds from your line of credit to a checking account
While lines of credit lack some of the key conveniences of credit cards, they offer some key benefits as well.
1. Low Cost
This is the most significant argument for lines of credit vs credit cards.
Right now, the average interest rate for a HELOC is 9.17%, which is historically high, but still much lower than your average credit card rate.
Even with interest rate fluctuations for unsecured lines of credit (Currently 12.5 – 22.5%), the interest rates make them a steal when compared to credit cards.
2. Freedom of Choice
This is something you also get from credit cards. But it’s worth pointing out for lines of credit as well because the interest rates are usually so much lower.
You don’t need to pay anything for a line of credit you do not draw from. When you do draw, you only need to pay back your minimums. Of course, the same could be said of credit cards again, but the rates for lines of credit are often more than half as low for lines of credit.
This makes lines of credit the safer option when full, on-time repayments aren’t a 100% guarantee.
3. Higher Limits
The credit limits on lines of credit are normally many times higher than those for credit cards.
Are lines of credit better than credit cards?
In many situations, yes. Perhaps the greatest reason is the most important one to most people: lines of credit are almost always far cheaper than credit cards.
However, lines of credit can vary greatly in terms of collateral. An unsecured line of credit is an obviously safer option if you’re not 100% sure you can stay on top of your repayments.
Of course, secured lines of credit will net you much lower interest rates. In particular, home equity lines of credit (HELOCs) can offer some of the lowest interest rates you can find.
Comparing Home Equity Loans vs HELOC: Which is Better For You?→
Is a personal line of credit the same as a credit card?
No, a personal line of credit is significantly different from a credit card. However, they are both forms of revolving credit, making using them feel similar.
Conclusions: When to Consider a Line of Credit or a Credit Card
There are some general rules of thumb for getting the most out of each of these options.
When to use a line of credit?
- If you need more than a month to pay back what you borrow, lines of credit are the superior option
- When you just want the cheapest option for revolving credit
- When you need a (much) higher credit limit
- If you have a big project or expect infrequent, unpredictable expenses
When to use a Credit Card?
- When you’re sure you can pay back whatever you borrow at the end of each statement period
- If you want to take advantage of rewards programs (assuming the above point is true)
- When you only need a small amount of money between paychecks
