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Personal Line Of Credit vs. Credit Card Explained

You can make your life easier by having the right financial tools at your disposal. But which is better, a personal line of credit vs. a credit card? Keep reading to learn more about revolving credit accounts below.

What Are Revolving Credit Accounts?

A revolving credit account allows borrowers to borrow money repeatedly up to their credit limit. A credit limit can range from a few hundred to a couple of thousand dollars. Credit limits depend on a borrower’s credit history and gross annual income.

Borrowers make monthly payments toward their credit card balance. Payments include the principal balance and interest fees. The minimum payment is the smallest amount a credit card company will accept. Still, borrowers can pay as much as they are able. Minimum payments are a fixed amount or a percentage of the outstanding balance.

There are two types of revolving credit accounts: personal lines of credit and credit cards. Each financial option is beneficial for borrowers, but there are key differences to consider before making a final decision. 

What Are Personal Credit Lines?

A personal line of credit (PLOC) is a set amount of money borrowers can access for a draw period. Personal lines of credit are ideal for long-term financing goals, such as refinancing debt or paying significant expenses. Below are some pros and cons of personal lines of credit.

Pros of Personal Lines of Credit

No Cash Advance Fees

Most personal lines of credit do not have cash advance fees. A personal line of credit gives borrowers a credit limit to use at will so that you can withdraw cash multiple times without financial penalties! No cash advance fees are a great benefit when you need to pay a costly expense in cash. For example, your car may need a tune-up, but your local mechanic only accepts cash.

Collateral Is Optional

Borrowers can use collateral with personal lines of credit for a lower interest rate. Acceptable forms of collateral vary per lender, but typically you can provide car titles, investments, savings accounts, etc. If you have a bad credit score, it may be easier to qualify for secured debt over unsecured debt. Collateral could help you obtain a higher credit limit and lower interest rates.

Cons of Personal Lines of Credit

Draw Period

When you get a credit card, the account is open indefinitely until you or the credit card issuer closes it. However, personal lines of credit are only active for a select amount of time, known as the draw period. A draw period can last several years, but the average length is two years. With a draw period, you must repay your credit card balance before the agreed-upon date.

Stricter Qualification Requirements

The qualification requirements for a personal line of credit are stricter. Many financial institutions require a good or excellent credit rating. Suppose you have a bad credit score that’s not going up. In that case, you may have difficulty getting approval for a personal line of credit.

No Financial Rewards

Personal lines of credit are a no-frills credit option because many issuers don’t offer rewards. You won’t be able to earn cash back or points through purchases. You will benefit from a reward program if you intend to use your borrowed money for various expenses.  

What Is a Credit Card?

A credit card allows borrowers to borrow money continuously and repay up to a set amount. Credit cards are similar to personal lines of credit but have different advantages. Read the pros and cons of credit cards below.

Pros of Credit Cards

Flexible Credit Requirements

Credit cards offer more flexible qualification requirements than personal lines of credit. If you have a credit score lower than 690 points, you could still qualify for a credit card account! Many creditors are willing to extend approval to individuals with subpar credit scores. Still, the repayment terms may not be ideal.  

Financial Rewards

You can earn financial rewards with credit cards. Many credit card companies offer cash back or point reward programs. You can earn some money, statement credits, or gift cards by making qualifying transactions. Consider how you typically spend your money to decide which rewards credit card to get.

No Draw Period

There is no draw period with credit cards. Borrowers can keep their credit line open indefinitely or choose to close a credit card account once they pay off their outstanding balance. However, a credit card issuer can close a credit account without notice due to prolonged inactivity, excessive late payments, and significant credit score decreases.

Cons of Credit Cards

High Interest Rates

Credit cards tend to have higher interest rates than personal lines of credit. Although you can find a credit card issuer that offers competitive rates, you will still pay more interest fees. You can avoid paying interest fees by paying your entire balance before the end of your billing cycle.

Cash Advance Fees

Credit cards come with cash advance fees, unlike personal lines of credit. You will have to pay a fee if you want to withdraw cash at an ATM using your credit card. A cash advance fee is either a flat rate or a percentage of the withdrawn amount.

Personal Line of Credit vs. Credit Card: Fees  

It’s important to know that any revolving credit line will charge fees for certain financial activities. The type of fees you must pay vary per lender, but below are five fees most creditors charge borrowers. 

Annual Fees

An annual fee is an amount you pay annually for using a revolving account. Not every financial institution charges an annual fee, so you can easily find a lender that doesn’t charge you for keeping an account open. Typically, lenders charge annual fees to cover the cost of exclusive features and benefits. 

Cash Advance Fees

A cash advance fee is a service charge for withdrawing cash from an ATM. This amount can be a flat fee or a small percentage of the withdrawn amount. You will have to pay a fine for withdrawing cash using a credit card, but most personal lines of credit do not charge cash advance fees. 

Balance Transfer Fees

A balance transfer fee covers the cost of moving debt from one account to another. If you want a personal line of credit or credit card for debt consolidation, expect to pay a percentage of the total transferred amount. 

Late Payment Fees

Your creditor will issue a late payment fee when you fail to pay on time. Late fees are typically a small flat fee. If you make multiple late payments, your account may default, and the late fees will accumulate. In addition, late payments remain visible on your credit report for up to seven years. 

Returned Payment Fees

A returned payment fee is a fine for bounced payments. A bounced payment occurs when insufficient money is in a borrower’s bank account to cover a scheduled payment. It’s critical to ensure you have sufficient money in your account to avoid returned payment fees. 

Personal Line of Credit vs. Credit Card: Which Should I Get?

A revolving credit account gives you spending flexibility. But which is better for you, a personal line of credit vs. a credit card? 

Key Takeaways​​ for Personal Lines of Credit

Personal lines of credit offer credit lines to borrowers that need flexible spending features. If you want the ability to withdraw cash from your revolving credit account, remember that most personal lines of credit do not have cash advance fees. You can withdraw money at any time without added fees! A personal line of credit can also help you keep a separate financial account that you can use for specific expenses. 

While personal lines of credit offer more favorable interest rates than credit cards, it may be more challenging to qualify without good credit. If you are still working on getting a good credit score, you can use collateral to lower the lending risk for lenders. 

Key Takeaways​​ for Credit Cards

Credit cards benefit borrowers who want a line of credit to spend on various expenses. Unlike a personal line of credit, credit cards do not have draw periods. There is no absolute deadline to pay off your credit card bill. Many credit card issuers offer rewards programs. You can earn cash back or spendable points for simply using your card for qualifying purchases. In addition, there are credit card options for various credit ratings.  

Unfortunately, credit cards tend to have higher interest rates than personal lines of credit. You may receive subpar repayment terms if you have a low credit score. And unlike a personal line of credit, you cannot use collateral to secure a lower interest rate or higher credit limit. 

The Bottom Line

A revolving credit account can help you afford the cost of large expenses. However, keep in mind that there are alternative financing options. Suppose you need a large amount of money for orthodontic treatment or necessary vehicle repairs. In that case, you can apply for fast cash loans online

An installment loan offers borrowers a one-time lump sum payment that borrowers can repay monthly for a specified period. Unfortunately, many borrowers end up struggling to repay lines of credit and credit card debt because there is no repayment schedule. Borrowers with a revolving credit account must commit to an aggressive repayment schedule to avoid falling into a debt spiral. 

The best financial option for you depends on your repayment preferences and current situation. As long as you focus on making on-time payments, any type of financial tool will inevitably be beneficial. Compare your financial options carefully to make the best decision for your wallet and credit report. 

References:
Personal Line of Credit vs. Credit Card
Understanding Revolving Credit