What Is the Difference Between a Line of Credit and a Credit Card?
The 4 ways lines of credit and credit cards differ are:
- Credit cards are almost always unsecured, whereas lines of credit are just as often secured as they are unsecured.
- Credit cards will offer you rewards programs that lines of credit can’t, but they’ll also often come with annual fees.
- Line of credit rates are usually lower and come with higher credit limits than credit cards.
- Credit cards charge high APRs and fees for cash advances, whereas lines of credit always deal in cash.
Though these two options share plenty of similarities, these key differences between lines of credit and credit cards might make one a better fit than the other, depending on your situation.
Lines of Credit 101
Access to an approved line of credit gives companies the flexibility to act quickly when addressing any number of unanticipated developments, whether they be positive or negative.
Suddenly receive an order that your current inventory can’t satisfy? Line of credit.
A storm takes you by surprise and forces you to make equipment repairs? Line of credit.
The mechanics of a line of credit are fairly simple—it’s a loan that acts more or less like a credit card, but without many of the typical features offered by cards like cash back, reward programs, grace periods, and so on.
With a line of credit, you’ll get approved for a specific credit limit, then have the option to use those funds as needed, with interest only accruing once you actually borrow money. After, you can repay the borrowed money immediately or over a predetermined repayment schedule.
When It Makes Sense to Use a Line of Credit
Now that we’ve got the general concept of what a line of credit offers, we should approach the line of credit vs. credit card debate from a more practical standpoint.
In which situations should a line of credit win out for you in the line of credit vs. credit card debate?
Let’s take a look at the most common scenarios in which a line of credit will serve you better than a credit card.
When You Don’t Need Bonus Rewards
Put simply, a line of credit doesn’t come with the exciting perks that credit cards often come with.
Sorry, no cash back, travel miles, or signing bonuses on the line of credit side of the line of credit vs. credit card debate..
Since it lacks many of the popular features attached to credit cards, why would someone opt for a line of credit vs. credit card?
Well, many credit cards will charge you in the form of an annual fee for all of the perks they offer you. Plus, a few of the following upsides to choosing a line of credit in the question of line of credit vs. credit card can make them more than worth their lack of rewards programs.
When You Need Access to Cash
Another main difference between line of credit and credit card gives them a leg up in the line of credit vs. credit card debate:
Lines of credit offer more flexibility, including less restrictive cash advance rules.
For example, lines of credit typically let you take a cash advance on 100% of the total amount you’re eligible to borrow. Credit cards, on the other hand, are generally far more restrictive, often capping cash advances at about 20%.
Credit card cash advances also come with sometimes burdensome fees, along with an additional 1-7% higher than the default interest rate, while advancing cash on your line of credit is often free of any fees other than potential draw fees).
When You Need a Higher Credit Limit
Plus, lines of credit typically win out in the line of credit vs. credit card debate for credit limits.
Generally speaking, through a line of credit, a lender will typically extend you a higher credit limit than a credit card issuer would through a credit card.
So, if you need access to more capital than you’ll be able to access through a credit card, then a line of credit might be your winner in the line of credit vs. credit card debate.
When You Need to Repay Gradually
Finally, if you won’t be able to repay your spend in full every month, then a line of credit should definitely be your winner in the line of credit vs. credit card showdown.
Especially when stacked up against lines of credit APR’s, credit card APR’s are punitive and can make any balance—no matter how small or short-lived—extremely expensive.
Meanwhile, more often than not, any credit you draw from a line of credit will be meant to be paid off gradually from month-to-month. And though an APR will apply, it will be much more manageable. Plus, as long as you stick to your predetermined repayment schedule for your line of credit, then gradually paying it off won’t hurt your credit history.
What Kinds of Lines of Credit Are Available?
Have you decided that lines of credit win out for you in the line of credit vs. credit card debate?
Your next step is to decide which kind of line of credit you want to apply for.
Unsecured Lines of Credit
Unsecured lines of credit are those that are not backed by any asset or collateral. In order to qualify, you’ll instead rely on your credit scores, borrowing histories, debt-to-income ratio, and other factors.
Buy in large, because secured lines of credit will be less risky for the lender, unsecured lines of credit will come with less desirable terms.
Secured Lines of Credit
Secured lines of credit are backed by some form of asset or collateral, like property, invoices, or inventory.
These are sometimes required for borrowers who aren’t creditworthy enough for an unsecured line of credit. Plus, even if you have the credit to qualify for an unsecured line of credit, you’ll likely be able to access more ideal terms with a secured line of credit, because it’s ultimately less risky for the lender.
If you default, however, you run the risk of losing any asset used to back the loan, making secured lending a bit riskier for those who aren’t on firm financial footing.
Credit Cards 101
To really get down to the bottom of the question of line of credit vs. credit card, it’s important to address the other side.
You likely already know that a credit card sets a monthly spending limit, you spend as much as you need up until that limit, and (in an ideal scenario) you then pay back the amount you spent every month.
However, in practice, having a credit card might look a little different than this.
Carrying a Balance on a Credit Card
If you’re not able to pay back your monthly balance for the month, then you encounter the credit card’s APR rate.
Depending on your creditworthiness at the time you got the card and the market Prime Rate, this APR could be high or low. Whether the APR is high or low, the sum that you’re unable to pay back on time will grow in size with time.
If you’re not responsible with your spending on a credit card, you could end up owing way more than you originally did.
Don’t get us wrong—you’ll still accumulate interest on overdue spending with a line of credit, but the interest rates will generally be a lot lower than with a credit card and will be built into the financing structure.
Earning Rewards for Spending With a Credit Card
That being said, with credit cards, you might be able to make up for lost value in the form of APR’s through their generous rewards programs.
Depending on which card you choose, you could earn up to a 5% return in rewards for each dollar you spend.
Additionally, many cards come with lengthy 0% intro APR periods in which you won’t accumulate debt on overdue spending as long as you make your minimum payments on time each month.
Not to mention, many credit cards will offer you a welcome bonus for spending a given amount within your first months after opening your account.
Withdrawing Cash With a Credit Card
While you will be to access cash through a credit card, it will be a complicated process. And that process will likely involve both cash withdrawal fees and a higher interest rate on the amount of cash you take out.
Additionally, you typically will only be able to access a fraction of your credit limit in the form of cash—credit cards will often put a cap on your cash advance access as 20% of your credit limit.
When It Makes Sense to Use a Credit Card
If your business needs cash on demand or would benefit from a more flexible payment schedule, a business credit card might not be right for you.
The rewards programs and intro perks that credit cards offer might be enticing, but be sure to weigh the pros and cons of signing on as a cardholder when debating over line of credit vs. credit card.
When You Only Need Limited Access to Cash
While you gain access to cash flow through a line of credit, credit cards will often only allow you to access a specific percentage of your spending limit—which is often already significantly lower than a line of credit—as cash.
Additionally, all credit cards charge you more than your normal APR to get a cash advance.
In fact, the interest on credit card cash advances can often begin to accumulate the day you take it out instead of on a monthly basis. Plus, a credit card company is likely to charge you a one-time cash advance fee that’s normally about 2%-5% of the amount of cash you take out.
With credit cards, cash advances are so costly that they’re best to avoid unless it’s an extreme emergency. As such, credit cards should only win out for you in the line of credit vs. credit card debate if you don’t require easy access to cash.
When You’ll be Able to Repay in Full Every Month
Finally, credit card payment plans are far more regimented than payment plans for lines of credit.
With a credit card, you will always have a monthly minimum payment due on the same day of every month. And though some credit cards might have a grace period, you will still be expected to pay a minimum payment by a specific date, or you’ll be saddled with hefty late fees.
Meanwhile, lines of credit are often far more flexible with payment schedules but will have interest built into your repayment plan. As such, if you know you’ll be able to repay your balance in full every month, then credit cards should win out for you in the line of credit vs. credit card debate.
What Kinds of Credit Cards Are Available?
If you do decide on a credit card over a line of credit for your business, it’s time to decide what you want to prioritize for your small business spending.
Do you want to make a big purchase to pay off over time without accumulating interest? You’re looking for a 0% intro APR period.
Hoping to rehabilitate your credit in order to access cheaper financing in the future? You’ll want a non-premium card that accepts cardholders with lower credit.
Or maybe you want to earn for every dollar you spend on your business. In that case, a cash back business card is right for you.
Here are the top business cards available on the market for each of these 3 preferences.
Great For: Making purchases with a 0% intro APR periodRead Full Review
- 12 month 0% intro APR period on purchases from the date of account opening
- 2X points for the first $50K spent
- No annual fee
|Intro apron purchases for 12 months from the date of account opening||Regular apr||Annual fee||Minimum credit|
|0%||13.24% – 19.24%||$0||700|
The Blue Business Plus From American Express
When you sign on as a Blue Business Plus cardholder, you’ll gain access to 12 months of 0% APR as long as you pay your minimum payments on time.
That means you can carry a balance for 12 months without accumulating a single cent of interest, which is an especially huge win for small businesses. That said, the intro period won’t last forever—after 12 months, your Blue Business Plus will have an APR that will vary with the market, so see the issuer’s terms and conditions for the latest APR information.
The best part?
You’ll get access to the Blue Business Plus and its 12-month 0% APR period without having to pay an annual fee.
Great For: Business owners with fair or average creditRead Full Review
- No annual fee
- 1% cash back on all purchases with no cap
- Rebuild personal and business credit
|Welcome offer||Rewards rate||Annual fee||Minimum credit|
|None||1% cash back||$0||580|
The Capital One Spark Classic for Business
The Spark Classic is by far the best option if you’re looking to build or rebuild your credit. You’ll only need to have average credit—a 550 or greater FICO score—for Capital One to consider you as a potential Spark Classic cardholder.
The Spark Classic allows for business owners with less-than-stellar or not enough credit history to spend responsibly and build up their credit score in order to be able to qualify for more premium financing in the future.
But that’s not all—you’ll also get a solid 1% cash back on every dollar you spend with your Spark Classic while you build your credit history. And with the Spark Classic, there’s no annual fee for being a cardholder, so you won’t have to pay to be able to rebuild your credit and save with every dollar you spend.
Great For: Point redemption rewardsRead Full Review
- 100,000 point signup bonus if you spend $15K in first 3 months
- 3x or 1x points depending on how you spend
|Welcome offerafter you spend $15,000 in first 3 months||Rewards ratefor the first $150,000, then 1x points||Annual fee||Minimum credit|
|100,000 points||1 or 3 points||$95||700|
The Chase Ink Business Preferred Credit Card
If you want maximum points for your business spending, Chase’s Ink Business Preferred is perfect for you.
When you spend $15,000 with your Ink Preferred within your first 3 months with the card, you’ll get 100,000 bonus points. If redeemed through Chase Ultimate Rewards, this signing bonus can get you a whole $1,250 worth of travel.
The one downside?
You’ll have to pay an annual fee of $95 to be an Ink Preferred cardholder. However, if you think of this annual fee relative to the amount you can earn with the Ink Business Preferred, it seems like small change.
Line of Credit vs. Credit Card: Who Wins?
The truth is, only you can choose the winner for your situation.
The ins and outs of lines of credit and credit cards only reveal that one might be better suited for your business than the other, not that one is objectively better than the other.
On one hand, If you need access to large amounts of lower interest cash with a higher spending limit and a less-regimented payment plan, the line of credit is your winner.
However, on the other hand, if you want access to perks and you’re certain you won’t carry a balance and be affected by APR’s, a credit card will reign supreme for you.
All in all, with the question of line of credit vs. credit card for your small business, it’s important to realize that both options have their pros and cons.
While a line of credit’s con might be a deal breaker, a con for a credit card might not be such a hit for you and your business. Though a pro for a credit card might just be nice, a pro for a line of credit might also be essential for your business finances.
You know your business best, so if you’re set on only getting one of these two forms of credit, it’s important to be realistic about which criteria are essential for you and make your decision from there.
How Can I Put This Knowledge to Action?
Credit cards get most of the attention, and many banks don’t advertise their line of credit services nearly as much. The fact that credit card debt is the reached the highest it’s ever been is only a number to prove how effective credit card marketing is.
The line of credit is often the best borrowing choice, but people are often hesitant to take the next step because they’re unfamiliar with it.
Business owners or individuals looking for maximum flexibility and revolving access to funds should read up on lines of credit and consider using one to meet their next capital requirements.
The caveat, of course, is that lines of credit can be very hard to qualify for. You can always start your search there, and if it doesn’t work out, a credit card can be your next best option.
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.