Do you need some extra funds but don’t have enough savings or don’t want to deplete whatever savings you have? This situation can be confusing, and you might be unsure which financial product best fits your needs.
There is good news for you in store! Two popular options can perfectly work for you – personal line of credit and credit cards.
This article is here to explain what they are and how they work. It also touches upon the subject of the credit vs. credit card line. So, let’s get started!
What Exactly is a Line of Credit, and How Does it Function?
A personal Line of Credit is a form of adjustable borrowing enabling you to get a specific amount of money whenever needed. Consider it a safety net for unexpected costs or a financial cushion for planned outlays. Unlike a traditional loan, which gives you a lump sum of money upfront, a line of credit allows you to borrow only what you need when needed.
This is How a Line of Credit Works: You can draw cash up to your authorized amount once accepted for a credit line. You will be charged interest only on the amount borrowed, not the whole credit limit. As you repay the borrowed amount, that money becomes available to be borrowed again. It’s like having a revolving door of funds at your disposal!.
What Exactly is a Credit Card, and How Does it Function?
You are probably aware of credit cards as a simple and generally recognized way of payment. A credit card allows you to make purchases on credit that must be repaid later. It gives you access to a fixed credit limit that you may use for day-to-day needs.
This is How a Credit Card Works: When you use a credit card to make a transaction, the credit card company pays the merchant on your behalf. You must then reimburse the amount you spent by the due date in whole or minimum monthly payments. You get monthly bills and may be charged interest on the remaining debt if you repay only part of the amount.
Personal Line of Credit vs Credit Cards: What’s the Difference?
Now that you understand what a personal line of credit and a credit card are, let’s explore the key differences between the two.
Repayment Terms: A line of credit typically has a structured repayment plan. On the other hand, a credit card allows you to make a minimum monthly payment or pay in full.
Cash Withdrawal Limit: Credit cards allow you to Withdraw 100% of your credit limit, but credit lines don’t.
Interest Rates: Personal lines of credit generally offer customized interest rates on the borrowed amount. Whereas credit card companies usually charge fixed interest rates.
Top-up Loan: You can get a top-up loan with a credit line but not credit cards.
Processing Fee: A line of credit may charge joining and annual fees, but credit cards usually don’t come with such charges.
When is it Ok to Use a Credit Line?
If you anticipate unforeseen expenses and want to be prepared for them, a line of credit is a fantastic solution. It allows you to access cash when needed while paying interest on the borrowed amount only. It is imperative during house improvements, school expenditures, and as a backup for emergencies.
When is it Ok to Use a Credit Card?
Credit cards are suitable for everyday spending and offer a simple payment mechanism. They frequently provide extra advantages such as rewards programs, cashback incentives, and travel bonuses, making them a popular choice for everyday purchases. A credit card may be helpful if you manage your spending appropriately.
There is no obvious winner in the battle between personal lines of credit vs. credit cards. Your unique circumstances, financial objectives, and spending patterns ultimately determine the decision between the two.
Remember that both options come with their own set of obligations. It is critical to utilize them sensibly, make regular payments, and properly manage your debt. Constantly evaluate your financial circumstances and, if necessary, seek the advice of a financial specialist. So, the next time you need money, evaluate the benefits and drawbacks of a line of credit vs. a credit card to make an informed decision.
