Low Fixed Rate Credit Card – Both credit cards and lines of credit allow you to borrow money when you need it and pay it back later. The two forms of loan work in a similar way, allowing you to purchase any amount up to the loan limit and then pay in varying amounts with minimum monthly payments required. This post covers many frequently asked questions about lines of credit and credit cards to help you decide which type of loan is best for your needs.
A line of credit is a type of revolving credit that allows you to access funds up to a certain pre-agreed amount. As you pay off your balance, more funds will become available to you.
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A line of credit works differently than a credit card. It has a grace period to use your credit and a repayment period to repay it. The terms for the following periods are specified in the contract with the lender:
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While most personal lines of credit are unsecured, you can also apply for a secured line of credit, a type that requires collateral. Common types include home equity lines of credit (HELOC), in which you borrow money against the equity in your home, and CD-secured lines of credit, which require you to put money into a certificate of deposit. With secured lines of credit, lenders can seize the assets you pledge in the event of a default.
A credit card is a form of credit that allows cardholders to make purchases as needed and pay back as much money as they can, as long as they make the minimum monthly payment. If you return your previous account balance before the due date, you will not have to pay interest. However, if you carry over a balance from one month to the next, credit card companies will charge interest and put it on your next statement.
While lines of credit and credit cards share some similarities, they also have some key differences to keep in mind when deciding which one is best for your personal finances.
Banks and other lenders usually base approval for any type of credit, loan limits and loan terms on the creditworthiness of the borrower. Lenders look at your credit score and other aspects of your financial background to make their decisions. To apply for a line of credit, you may need to provide financial documents, such as bank statements. To apply for a credit card, you must provide financial information such as income and housing costs. Some credit card issuers offer pre-approval letters, which simply state that it’s likely (but not guaranteed) that you’ll be eligible for their financial products.
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Unlike installment loans, credit cards and lines of credit only charge interest on the average balance owed on your account. (You should review your credit agreements to understand how the lender calculates your average account balance.) Lines of credit, however, tend to have one big advantage over credit cards: lower interest rates. Although interest rates vary, according to CNBC, as of September 2022, lines of credit have APRs ranging from 9.30% to 17.55%, while credit cards range from 8.99% up to 29 .99%.  
According to Forbes Advisor, as of November 2022, the average interest rates for home equity lines of credit are as follows*:
Unlike other types of fixed rate loans, lines of credit have variable interest rates that can fluctuate over time. For example, US banks base the APR on the prime rate plus margin. As the prime rate fluctuates, the APR fluctuates as well. Finally, prices can also vary depending on the type of account you may have with the bank. Variable rate Citbank credit lines, as of November 2022, from 18.25% to 21.25%, depending on the type of account and package.
While credit cards are convenient, they often carry fees that need to be considered. In addition to interest, cardholders may be required to pay late payment fees, annual fees, foreign transaction fees, balance transfer fees, and cash advance payments. Lines of credit typically don’t charge extra for cash withdrawals, but you may want to ask your lender about annual fees, prepayment fees, and other fees that may be associated with your account.
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Please note that if you do not have the credit card balance and you pay the balance before the due date, no interest will be charged to your account. In contrast, lines of credit generally do not have a grace period.
Lenders set lending limits for both unsecured credit cards and lines of credit based on the borrower’s credit rating, credit history, and other financial factors. Limits on unsecured lines of credit range from $300 to $100,000 or up to 85% of the home equity on a secured HELOC. Maximum credit cards can allow up to $500,000 in spending, which is rare, but $10,000 or less is more common. The limit on secured credit cards is usually equal to the amount you deposit into a certificate of deposit or savings account as collateral. To help borrowers with little or no credit, secured cards are often a good choice for those looking to get credit from scratch.
To help you decide which type of loan is right for your financial situation, consider the following advantages and disadvantages of lines of credit.
While not all types of credit cards are created equal, you may want to consider the following advantages and disadvantages commonly associated with credit cards.
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Both credit cards and lines of credit can affect your credit score positively or negatively, depending on how you handle them.
When used responsibly, credit cards can play an important role in building credit. By paying your bills on time, you could see your credit score rise. However, if you miss payments, make late payments, use a large percentage of your limit, or default on your credit card, your credit score will likely go down.
Like credit cards, lines of credit can have a positive effect on your credit score if you manage them carefully. They can contribute to your payment history, overall available credit, and a diverse mix of loan types, all of which are important factors in your credit score. However, if you don’t make the minimum monthly payment or overlook it altogether, your score is likely to go down.
In addition to weighing the pros and cons of credit cards and lines of credit, you may want to think about your financial situation before choosing a line of credit or credit card.
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Both credit cards and lines of credit offer a convenient and flexible way to borrow money. While credit card options are available to people with a variety of credit scores, lines of credit are often more accessible to those with better credit. To build your credit before applying for a line of credit or an unsecured credit card, you may want to consider a Credit Builder account and secured credit card. Both options can help consumers build their credit, whether you have bad credit or no credit.
Ana Gonzalez-Ribeiro, MBA, AFC® is a Certified Financial Advisor® and author and bilingual personal finance educator dedicated to helping residents in need of financial literacy and counseling. Her insightful articles have appeared in various news organizations and websites including Huffington Post, Fidelity, Fox Business News, MSN, and Yahoo Finance. She also founded the motivational and personal finance website www.AcetheJourney.com and translated the book Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP into Spanish. Ana teaches personal finance courses in Spanish or English on behalf of the W!SE (Working In Support of Education) program and has taught seminars for non-profit organizations in New York.
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