Line of Credit vs Credit Card: What's The Better Choice?

Need to borrow money? You've got options. Credit cards and lines of credit both let you borrow up to a certain limit and pay interest if you don't pay off your balance right away. But they work differently.

Lines of credit often come with higher limits and lower interest rates than credit cards. But credit cards are more widely accepted for everyday shopping and can earn you points or cash back on purchases.

So which one makes more sense for you? It depends on what you need the money for, how you like to spend, and what your credit score looks like. Let's break it down.

Is a credit card a line of credit?

Yes, credit cards are technically a type of line of credit. But personal lines of credit are quite different from credit cards in how they work. Both let you borrow money repeatedly up to a limit, but that's where most similarities end. You can have a line of credit with no card attached at all.

Think of "line of credit" as a broad category that includes several products: credit cards, personal lines of credit, home equity lines of credit (HELOCs), and even overdraft protection on your checking account.

Lines of credit

A line of credit (LOC) is just a preset amount you can borrow from your bank when needed. You don't pay anything until you actually use it. Once you do, interest kicks in right away, and you'll need to make payments on both the interest and what you borrowed. KOHO's line of credit offers flexible borrowing with competitive rates.

Lines of credit work well for:

• Bigger expenses that credit cards can't handle

• Paying vendors who don't take credit cards

• Overdraft protection for your bank account

• DIY debt consolidation (since interest rates are lower than credit cards)

LOCs usually start around $5,000 but can go much higher, especially with home equity lines of credit (HELOCs). Getting approved is tougher than for credit cards - you'll need solid credit and income. Checking your credit score can help you understand what products you might qualify for.

The Money Side

You can lower your interest rate by securing your LOC with your home or investments. The bank takes less risk when you put up collateral, so they charge less interest.

Watch Out For

• Using a LOC for RRSP contributions only makes sense if you'll use the tax refund to pay down the LOC

• Interest rates float with the prime rate - when rates rise, so do your payments

• If you secure your LOC with your house or investments and can't make payments, you could lose those assets

Credit cards

Credit cards work better for everyday spending, especially if you pay them off monthly. Unlike LOCs, credit cards give you a grace period (about 30 days) before interest kicks in on purchases. But cash advances collect interest immediately.

Credit card interest rates are much higher than LOCs, but they offer perks like:

• Reward programs for points, cash back or travel

• Wider acceptance at stores and online

• Better consumer protections

• No need for collateral

Be Smart

Don't chase rewards if you're carrying a balance - the interest will cost far more than any perks are worth.

And always read the fine print on those tempting "0% interest" offers. When the promotional period ends, the rate jumps dramatically and can quickly balloon your debt.

Why credit cards cost you way more

Say your car breaks down out of nowhere. The mechanic tells you it'll cost $2,800 to fix.

You don't have that kind of cash right now, so you're thinking about using a credit card with 27% interest. If you take a full year to pay it off, you'll pay around $269 monthly, with about $425 going to interest alone.

But if you used a line of credit at 8% instead, your monthly payment would be about $245, and you'd only pay about $140 in interest over the year.

That's $285 you could save just by using the line of credit. That's real money that could stay in your pocket!

How credit cards and personal lines of credit differ

Interest rates: Personal lines of credit usually have lower interest rates than credit cards. Credit cards average around 16%, while lines of credit might offer single-digit rates if you have good credit.

When interest starts: With a line of credit, interest starts immediately when you borrow money. Credit cards give you a grace period – if you pay your full balance by the due date, you pay no interest.

Rewards: Credit cards offer rewards like cash back or travel points. Lines of credit don't offer any perks.

Borrowing limits: Lines of credit often come with higher limits – sometimes $25,000 or more. Credit cards typically have lower limits.

Getting your money: With a line of credit, you can write checks, use a bank card, or make cash withdrawals. Credit cards require using the physical card or card details online.

Application process: Lines of credit usually need more paperwork and financial documents than credit card applications.

Which should you choose?

For everyday spending – gas, groceries, clothes – credit cards make more sense. You can earn rewards and avoid interest by paying in full each month.

For bigger expenses or emergencies where you're not sure of the final cost, a line of credit might work better. Think surprise home repairs or ongoing medical bills. The lower interest rates and higher limits give you flexibility, and you only pay interest on what you actually use.