Banks as well as other private lenders are constantly looking for new ways to make their products and services more accessible to potential borrowers. This can be seen especially when looking at how easy it is now to get a credit card. The credit rating requirement for it is extremely small and most banks will only require proof of identity, proof of address, and proof of income, as part of the agreement. As a result, anyone who has a stable source of income can get and use a credit card, making them very popular financial tools.
This having been said, as useful as credit cards may seem, they also come with several big disadvantages, especially for individuals who need to use them regularly. Luckily, there are other financial products that give individuals access to large amounts of money, such as lines of credit. So, what is the difference between a credit card and a line of credit?
Differences in Requirements, Terms and Conditions
First of all, it is important to understand that although both of these products give the borrower access to large amounts of money, they are different types of products. Credit cards are designed for the average individual, to give him quick access to additional finances. On the other hand, lines of credit have much higher values than credit cards, as well as lower interest rates. The downside with the latter is that they need to be secured against the borrower’s property.
Furthermore, a mediocre credit score is required to get a credit card, but lines of credit are only approved for individuals who have a good relationship with the lender and also have shown to be able to manage their personal finances without any issues.
Differences in Functionality and Ease of Accessible
Credit cards give the borrower quick access to a credit account that can only be accessed using the card itself. However, when it comes to lines of credit, the card is optional. Depending on the terms and conditions, the lender may not even include the possibility of issuing a card to the borrower.
Generally speaking, credit cards can be used to pay for any type of purchases, however, lines of credit may sometimes be more restrictive. In some cases, the borrower may even have to wait for a type of payment to be approved by the bank representative. This process can take up to 24 hours.
It is also worth mentioning that lines of credit, except for personal-use ones, are given out for very specific types of payments. For example, a company may apply for a line of credit that can be used to pay the salaries of its employees. In this case, the money can only be used for this purpose and each withdrawal will have to be approved by the lender.
As far as personal lines of credit are concerned, these are very similar to credit cards, with the exception that they have much lower interest rates.
Differences in Terms of Credit Score Impact
Lastly, credit cards and lines of credit are vastly different in how they affect the borrower’s credit score. Using a credit card too often will have a negative impact on the cardholder’s credit score. However, lines of credit can be used freely without any issues. Withdrawing money from them will not have a negative, however, reaching the end of the agreement without being able to repay the money will drastically lower an individual’s credit score.
As a warning, having a high credit utilisation ratio for either of the two will reduce the borrower’s credit score.