Line of Credit vs. Credit Card Pros and Cons

There are three main types of credit:

• Open Credit
• Installment Credit
• Revolving credit

Open credit is used for bill payments and doesn’t increase your credit score at all. Secured and unsecured loans are installment credit accounts, lines of credit and credit cards are revolving credit accounts. The difference is that installment credit is locked in and paid in monthly payments. Revolving credit means you can keep using the credit limit and paying it off as many times as you like.

How does a line of credit work in Canada?

In short, a line of credit is a type of loan that has a pre-set limit. The great thing about a line of credit is that it doesn't have to be used for a certain purpose and you can save however much of the allotted amount that you choose. The main difference between a loan and a line of credit is that you only have to make the interest payments on the amount that you have borrowed every month and you can pay down the principal amount at any time that you choose.

Unlike a personal loan, there are usually some sort of fees on a line of credit like registration or admin fees. The interest rate on a line of credit is usually variable unlike a personal loan which is fixed.

In order to access money from a line of credit you can either:

• Write a cheque
• Use an ATM
• Online banking
• Telephone banking
• Transfer into your chequing account

To pay back a line of credit, typically all you have to do is transfer the money from your bank account to the line of credit account.

Secured and unsecured line of credits

Just like how there are secured loans and unsecured loans, there are also unsecured lines of credit and unsecured lines of credit. What is the difference?

Unsecured

These types of lines of credit will give you access to money without any collateral. These are the hardest types of lines of credit to obtain. The bank takes a higher risk when they give you access to cash advances, so, while your interest rate will be lower than most personal loans and credit cards, it will be higher than a secured line of credit.

Secured

The most common type of secured line of credit typically is a HELOC, also known as a home equity line of credit. Because you are offering up your home as collateral, you could end up having a higher credit limit. The limit on a HELOC is based on 80% of the value of your home minus the amount owing on your mortgage. This is the maximum amount that you can borrow.

While it is easier to obtain this type of line of credit, in order to borrow money from your HELOC, you should be certain you are able to make the monthly payments. If you default on this, you could end up losing your home.

Personal line of credit vs a credit card

The main differences between a personal line of credit and a credit card are how the interest is incurred and how the money is paid back. With a personal line of credit you can access the money directly from your bank account and only have to pay the interest. There is likely to be a lower interest rate on a line of credit and there is no time limit to pay back the total amount borrowed.

With a credit card, there is a minimum monthly payment you have to pay that likely only goes towards the interest. Interest rates on most personal credit cards are quite high, however if you pay them off before your statement date then you do not have to pay any interest. For this reason, they are better for small purchases and easy to carry around.

Business line of credit vs credit card

While the principles for business line of credits and credit cards are the same as personal ones, if they are used correctly they can be used in order to track business expenses and create less work when it comes to organizing the books for the business. Because business credit cards provide a breakdown for monthly expenses, that’s what they are best used for. They work the same as receipts for things like gas purchases and other things. While it is best practice to keep your receipts, having the credit card statement lets you know what receipts you should have and gives you a secondary form of documentation.

Business line of credits are best used for large purchases. Be sure to keep the receipts for these as well. The business line of credit allows you to pay it back whenever you like, just like a personal line of credit, and likely has a much lower interest rate than the credit card, which is why it is great for large purchases.

Advantage and disadvantages of a line of credit

When it comes to getting a line of credit, there are many advantages that make it more desirable than other forms of credit.

1. They have lower interest rates that are based on the prime rate set by the Bank of Canada.
2. Depending on the financial institution, you may not be charged a set up fee.
3. It is possible to get your chequing account overdraft transferred to your line of credit.

On the other hand, there are some disadvantages to getting a line of credit.

1. The ease of access. This makes it super easy to wrack up your debt.
2. The variable interest rates. If interest rates rise a lot it could make a line of credit really difficult to pay back.

Advantages and disadvantages of a credit card

While people generally are advised to stay away from credit cards, there are some advantages to using them if they are used correctly.

1. They are convenient. If you need money in a pinch, you have it.
2. They build credit. If your credit utilization is kept in a good ratio, usually recommended to be 35% or lower, then they can be very beneficial to your credit score.
3. They have affordable currency conversions if you find yourself in another country.
4. They can be a great way to build rewards and get discounts.

While there are some good things in regards to using credit cards, there are also some disadvantages.

1. They have really high interest rates if they aren’t paid before the statement date.
2. Some have annual fees on top of the high interest rates.
3. They charge a fee for late payments.
4. They encourage overspending which can lead to high amounts of credit card debt.

Can you pay off your credit card with your line of credit?

Due to the fact that a line of credit is able to be used for whatever purpose you need, you are able to pay off your credit card with a line of credit or even a personal loan. While you do still owe the money, you are able to decrease your interest rate making the debt more affordable to pay off. If you have more than one credit card to pay off, it can consolidate your debt into one affordable payment.

How does the interest on a line of credit work?

The interest on line of credit’s work much differently than that of credit cards. Banks take the prime rate set by the Bank of Canada then they add a percentage on top of that. For example: when you look at an interest rate of a line of credit it will say prime + whichever percentage the bank has chosen. This is what makes interest rates variable since the prime interest rate is always changing.

With a line of credit, you only have to pay the interest monthly and then pay principle whenever you choose. With a credit card, there is a set monthly payment.

What credit score do you need to get a line of credit?

In order to get a line of credit it is recommended to have at least a credit score of 670 or higher. This means you should have a credit score in the good credit range. The reason for this is because the bank is essentially giving you a cash advance that isn’t secured. This means you can take the money out and put it back whenever you choose. In order to approve your for a line of credit, the bank needs to have confidence that they can trust you to pay the money back and be financially responsible.

How do you know if your credit score is high enough?

In order to find out where your credit score stands, you have quite a few different options.

1. Download a free credit score app. There are multiple different platforms that will give you an estimate of either your Transunion or Equifax credit score. While this won’t be the most accurate since it is just a soft check, it will give you a good idea of where you stand with your credit report.
2. Check you score through online banking. Many financial institutions will offer a free credit score right through your online banking. This is essentially similar information to what you can find through the credit apps.
3. Check with the credit bureaus. Just like the banks and apps, both Transunion and Equifax offer updated monthly soft credit checks right on their website.

By checking your credit score before you apply for a line of credit, you will be able to determine if there is a likelihood of approval. Once you submit your application the financial institution will go through a hard credit check which will slightly lower your credit score. If there is little likelihood of you receiving an approval, you can always take some time to improve your credit score before you submit your application.

Are you better off using a credit card or a line of credit?

This is a difficult question to answer. Whether it is better to use a credit card or a line of credit depends on what you intend on using the money for.

Large Purchases

If your intention is to buy something large like a vehicle, a boat or even furniture, you are better off using a line of credit. While you can get a cash advance with a credit card, there is an interest rate increase for a cash advance whereas it stays the same with a line of credit. They are meant for cash advances.

Everyday Expenses

When tracking everyday expenses or using for small purchases, this is where you prefer a credit card. You can pay these off before the statement date every month and avoid any interest payments. They also allow you to track your spending with monthly statements.

Earning Cash Back

When it comes to earning cash back, rewards and in some cases even interest free payments for a few months, a credit card is the best choice. It is important to weigh the positives and negatives but if you are financially responsible with your credit card and earning cash back, then that is the way to go.

Is a personal line of credit the same thing as a credit card?

This is where things get tricky. While credit cards and lines of credits are different traditionally, credit cards are essentially lines of credit but line of credits aren’t credit cards.

To explain this a little better, a credit card is just a type of line of credit that has higher interest rates. A line of credit in itself does not need a credit card to be active and can be used specifically for cash advances.

Which is more difficult to get: a line of credit or a credit card?

Line of credits are traditionally more difficult to get than credit cards. Credit cards are normally the first form of credit you get when you are able to start obtaining credit lines. While they may start out at a lower limit, you can increase it overtime once the credit card issuer recognizes that you make your payments on time.

Line of credits are more difficult to get since they have lower interest rates and higher limits. Line of credits do require some form of credit history and normally require you to fall somewhere between the good credit and excellent credit range.

Where can I get a line of credit?

Most lines of credit, especially unsecured ones, are done through your bank, credit union, or financial institution. Secured lines of credit, however, are offered by some third party lenders.

Spring Financial doesn’t offer lines of credit, however, we do offer personal loans. If a line of credit doesn’t work for you, we offer personal loans ranging from $500 to $35,000 and there is no penalty for paying them off early. We work with all different credit types so, no matter your credit score, we can help. We also report to both credit bureaus, Transunion and Equifax, so if your goal is to increase your credit score as well as borrow money, we got you covered. Apply online or give us a call at 1-888-781-8439.