Credit cards and lines of credit share many characteristics. You may even be wondering how they differ at all, and whether it’s better to make your business purchases with one or the other.
In fact, there are a few key differences that can help you determine when to use one or the other.
Similarities Between Lines Of Credit & Credit Cards
Credit cards are technically revolving lines of credit, though they aren’t often called that. As you pay off your balance, that credit becomes available to use again.
Beyond that, both credit cards and lines of credit accrue interest on any outstanding debt.
Differences Between Lines Of Credit & Credit Cards
The most obvious difference is that not all lines of credit are “revolving.” When a bank extends you a line of credit, it may be a one time offer. Usually, when a financial institution extends a non-revolving line of credit it’s to cover a specific expense the borrower is seeking to fund. Unlike a loan, a line of credit gives the borrower some extra flexibility to negotiate with vendors.
The differences between revolving lines of credit and credit cards are a bit more subtle. For starters, a line of credit often comes with more fees than does a credit card. You may, for example, have to pay a monthly or annual fee to keep your line of credit open. While some credit cards (particularly business credit cards) do come with annual fees, it’s not hard to find ones that don’t. Some lines of credit will also charge a fee every time you make a withdrawal.
Though it will vary from case to case, you can also generally get a higher credit limit through a line of credit than with a credit card. Both credit cards and lines of credit come in secured and unsecured forms, though with credit cards you’ll only want to go the secured route if poor credit keeps you from qualifying for a traditional card.
Since lines of credit can be secured by assets, it’s not unusual to see better interest rates there than with credit cards.
Note that it’s a lot easier to get a credit card than a line of credit, although getting an elite credit card can be challenging in its own right.
When To Use A Credit Card
The biggest difference between a line of credit and a credit card is convenience. Credit cards are designed to make retail purchases easy. Most businesses these days are equipped to swipe your card (or read your chip) at theÂ point of sale. With some rare exceptions, it’s not easy to applyÂ for a loan at the time of purchase.
Credit cards are also more ubiquitous in this card-driven online market. Chances are you’ve regularly used your credit card on Amazon, to pay your cell phone bill, or make a security deposit. It’s just as easy to use your credit card for common expenses. In fact, credit card companies try to encourage you to do so through reward programs. The terms of these programs vary, but essentially they all return a small percentage of the money you spend in the form of statement credit, cash, gift certificates, or other products.
Another perk you’ll see with credit cards that you won’t often get with lines of credit are introductory offers like 0% APRs. If your card is still within that introductory window and you expect you’ll be paying your bill off over the course of several months, the credit card is a clear winner.
When To Use A LineÂ Of Credit
At this point, it may look like credit cards have a clear advantage over lines of credit. Not so fast.
One thing credit cards are really inefficient at is cash transactions. Most credit cards will only let you cash advance a fraction of your total limits. Even then you’ll usually incur very high-interest fees on that cash.
Lines of credit, on the other hand, are convenient whenever you need to produce a good chunk of cash on short notice. You won’t incur premium fees for withdrawing that money and you won’t be limited to only a fraction of your credit limit.
A line of credit’s lower interest rates may also make it preferable when we’re talking about big ticket items you can’t pay off quickly. If you’re using your credit card optimally, you shouldn’t be paying any interest on it at all; you’ll be paying it off in full each month. If you can’t do that, a line of credit may often be cheaper over the long run and have a more structured repayment scheme than a credit card.
Credit cards and lines of credit can both provide additional financial heft for your business. Knowing when to use each one could make the difference between convenience and unnecessary debt for your business.
Check out our comparison features if you need help finding aÂ credit card or a line of credit.
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