If you're trying to decide between a line of credit vs. credit card, you'll want to consider how much money you actually need. Lines of credit make larger purchases easier, as they often have lower interest rates. But credit cards offer rewards and insurance coverage, making them ideal for everyday spending.
This article further explains the differences in eligibility, interest, and features between these two financial products. This way, you know you're using the right product for your needs.
Key Takeaways
- Even though credit cards typically have higher interest rates, they can earn rewards and are easier to use for small, everyday purchases.
- If you know you’ll be making a large purchase that you can’t pay off quickly, a line of credit, which charges less interest, might make more sense.
- Although you’re extended a line of credit, you’re only charged interest on the actual amount of credit that you use.
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Line of credit vs. credit card
Before we dive into the specifics of each credit product, here's a quick overview of the key features:
| Line of credit | Credit card | |
|---|---|---|
| Interest rates | * Typically lower than for a credit card, but varies by person | * Rates are generally fixed at around 20% |
| Types | * Secured * Unsecured | * Regular * Secured |
| How to use | * Withdraw cash from an ATM * Pay bills with online banking * Transfer funds to other accounts | * Pay in store or online * Withdraw cash from an ATM |
| Minimum to pay back | * Interest accrued | * Flat rate (often $10), percentage of your balance (often 3%), or both – plus any accrued interest |
| Rewards | * None | * Vary by card * Some cards offer cash back or points you can use for travel, statement credits, etc. |
| Insurance | * None | * Varies by card * May include mobile device coverage, travel insurance, purchase insurance, etc. |
| Pros | * Ideal for consolidating debt * Typically offers a higher credit limit, especially with a home equity line of credit * Interest rates tend to be well below average credit card rates | * Easy to make everyday purchases * Interest rates rarely change * Balance transfer credit cards offer lower interest rates for paying down debt |
| Cons | * Interest rates can change over time (up or down) * May have origination or monthly fees * Banks can cancel your line of credit at any time * Typically more difficult to be approved for than a credit card | * Interest rates average around 20% * Easy to rack up debt quickly if you don't pay your balance in full each month * Late fees and interest can snowball if you miss payments |
How does a line of credit work?
A line of credit is a loan that allows you to access money on demand. You'll have to qualify and apply for the loan. Once approved, you'll be assigned a credit limit and can borrow as much or as little of it as you want.
There are 2 main types of lines of credit: unsecured and secured.
- Unsecured lines of credit don't rely on anything for collateral. These are personal lines of credit that you apply for, and the issuer considers your finances before approving you for a specific amount and assigning an interest rate.
- Secured lines of credit are attached to collateral – something valuable that you put down as proof you will repay the debt. The most common are home equity lines of credit (HELOCs), which are available to homeowners with at least 20% to 35% home equity. Remember, though, that if you fail to repay your loan, you could lose your home.
Once you've agreed to the lender's terms and opened the credit line, you can access the money by:
- Withdrawing cash from an ATM
- Writing a cheque
- Paying bills or transferring money through online banking
You can use the money for anything, but be aware that as soon as you start taking money from your line of credit, you'll have to start paying it back.
How you repay the line of credit depends on your loan terms. Sometimes, you'll only be required to pay the interest and then make a large (balloon) payment once the term ends. Other times, you'll be put on a fixed payment schedule. You can make additional payments to the principal whenever you like.
When should you use a line of credit vs. a credit card?
Simply put, a line of credit is usually a better choice for big purchases, but a credit card is a better option for everyday spending.
For a large expense that you know you can't pay off within 1 or 2 statement cycles, a line of credit makes things easier. They usually have much lower interest rates than credit cards, so you'll pay less in interest over the course of the loan.
A line of credit is also a handy way to consolidate debt. Let's say you've got a few credit cards with high balances. You could open a line of credit and use the funds to pay off those individual debts. Now, you have a single payment at a much lower interest rate, allowing you to pay your debt faster.
For everyday purchases, though, a credit card is easier and, really, better. These are the expenses that you'll pay back regularly, such as groceries and gas. Many credit cards offer rewards on your purchases, so you might also enjoy cash back or rewards, plus perks like insurance coverage, lounge access, roadside assistance, concierge service, and more.
Best low-interest credit cards
Does a credit card seem like a better option for your financial situation? If so, consider one of these low-interest credit cards:
| Card name | Interest rates | Annual fee and income requirements | Welcome bonus | Learn more |
|---|---|---|---|---|
| MBNA True Line Mastercard | * Purchase: 12.99% * Cash Advance: 24.99% * Balance Transfer: 17.99% | $0 * None |  $40 GeniusCash + 0% interest on balance transfers for 12 months (terms) | Learn more |
| MBNA True Line Gold Mastercard | * Purchase: 10.99% * Cash Advance: 24.99% * Balance Transfer: 13.99% | $39 * None | None | Learn more |
| BMO Preferred Rate Mastercard | * Purchase: 13.99% * Cash Advance: 15.99% * Balance Transfer: 15.99% | $29 * None | $40 GeniusCash + 0% interest on balance transfers for 18 months (terms) | Learn more |
| CIBC Select Visa Card | * Purchase: 13.99% * Cash Advance: 13.99% * Balance Transfer: 13.99% | $29 * $15,000 | 0% interest on balance transfers for 10 months (terms) | Learn more |
| Desjardins Flexi Visa | * Purchase: 10.9% * Cash Advance: 12.9% * Balance Transfer: 12.9% | $0 * None | Learn more |
FAQ
Is a credit card or line of credit better?
Neither is better than the other overall. Credit cards are best for everyday purchases and short-term use, especially because you can earn rewards and have purchase protection. Lines of credit offer lower interest rates, making them better for larger expenses or longer-term borrowing. Consider your repayment habits and financial goals to choose the right option.
What are the disadvantages of a line of credit?
Depending on your lender, a line of credit might have variable interest, so you might end up paying more in interest than you originally thought you would. There might even be additional account maintenance fees. Lenders also have stricter credit score requirements for issuing lines of credit.
What's the difference between a credit card and line of credit?
One of the biggest differences between lines of credit vs. credit cards is how easy it is to access cash. It will be easier to get access to funds at a lower interest rate using a personal line of credit than if you were to get a cash advance from an ATM using your credit card.
Are there different types of lines of credit?
Yes, there are different types of LOCs. Personal LOCs are best for family and individual use, but business owners can also get a business line of credit. If you're a homeowner, you can access the equity in your home through a home equity line of credit.
What's the best low-interest credit card?
The best low-interest credit card in Canada is the MBNA True Line Mastercard. The card has a 0% balance transfer offer for a full year, while purchases are only charged at 12.99% – well below the average 20% interest rate of most personal credit cards.
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