When you’re looking to borrow money, it’s important to understand the differences between the types of borrowing products. Deciding between a personal line of credit and a credit card might not be easy and depends largely on your financial situation and long-term goals. We break down the basics of personal line of credit versus credit cards so you’ll know how to make the best decision for your lending needs.

What is a Personal Line of Credit?

A personal line of credit is an unsecured loan from a lender such as a bank or other financial institution that allows the borrower to draw on a pre-approved credit limit for a specified period of time. The borrower only pays interest on the amount of money withdrawn from the line of credit and only pays interest for the time the balance is outstanding.

Benefits of a Personal Line of Credit

• Flexibility – The line of credit can be used for a variety of purposes and can be drawn on as needed, allowing the borrower to have access to funds just in case.

• Low Interest Rates – Since personal lines of credit are typically unsecured loans, the interest rates tend to be lower than other types of credit products, such as credit cards or car loans.

• Long-term Nature – Personal lines of credit are not intended to be used as a long-term solution, however, they are available as long-term solutions as repayment terms normally last between one and five years.

• Potential to Rebuild Credit – If a borrower has a good credit history and makes on-time payments, a personal line of credit could help them to rebuild their credit score.

• Potentially Higher Credit Limit – Depending on the lender, borrowers may have access to higher credit limits than they would with other types of credit products.

Drawbacks of a Personal Line of Credit

• Application Process – The application process for a personal line of credit can be lengthy and requires the borrower to submit personal and financial information, including credit reports and tax returns. The financial institution may also use a hard credit inquiry to access the borrower’s credit information, which can leave a negative mark on their credit score.

• Higher Interest Rates – While interest rates for personal lines of credit may be lower than other types of credit, they can still be quite expensive.

• Potential for Overdrafts – If a borrower withdraws more than their approved limit, they may be charged overdraft fees or higher rates of interest.

• Prepayment Charges – Some lenders may charge a fee if the borrower decides to pay off the loan before the scheduled due date.

What is a Credit Card?

A credit card is a payment card issued by a financial institution or business. It allows borrowers to make purchases up to a certain amount and pay back the balance at the end of the month. Credit cards come with a variety of potential benefits and are typically more flexible than personal lines of credit.

Benefits of Credit Cards

• Low Initial Investment – It is usually free to open a credit card account, and there is typically no collateral required.

• Simplified Application Process – Unlike personal lines of credit, credit cards often require less paperwork and time to open an account.

• Spend Flexibility – Credit cards can be used at almost any retailer or online store. This makes them a great option for experiencing different types of products or services.

• Credit Building Tool – Making consistent on-time payments on a credit card can help to improve a borrower’s credit score over time.

• Possibility for Credit Line Increase – If a borrower demonstrates responsible spending habits, some credit card issuers may decide to increase the borrower’s credit line.

• Online Account Management – It is easy to manage an account online and make payments on the go.

Drawbacks of Credit Cards

• High Interest Rates – Credit card interest rates are typically higher than interest rates for other types of credit products.

• Temptation for Impulsive Buying – Credit cards can be easily used for impulse purchases, making it difficult for the borrower to manage their spending.

• Fees – Credit card issuers may charge a variety of fees, such as annual fees, over-the-limit fees, and foreign transaction fees.

• Potential for Debt – It is possible to fall into debt if a borrower is unable to pay back their balance in full at the end of the month, especially if the borrower carries a balance forward.

When deciding between a personal line of credit and credit card, it’s important to consider your personal and financial situation. A personal line of credit may provide access to funds in case of an emergency while a credit card can help you build credit over time. Ultimately, it’s important to weigh the benefits and drawbacks of both types of borrowing products to decide which option is more suitable for you.