Credit cards and how they function are known to almost everyone, but what is a line of credit? When should this be used instead of a credit card and how does it vary from a credit card? You’ll probably examine business finance choices including loans, lines of credit, and company credit cards when you look into financial instruments to borrow money to build your firm. Although commercial loans are very simple to comprehend, you may have queries regarding the distinction between a line of credit and a credit card which we will clear hereon:
A Credit card is a financial tool to simplify your payments. It is a plastic or metallic card which you can swipe or insert in a card machine to make payments for your purchases or to withdraw cash. A Credit Card enables cardholders to loan funds to pay for products and services from businesses that accept credit cards. Credit cards require cardholders to repay the borrowed funds, plus any associated interest, and any extra consented charges, in whole or over time by the billing date.
Features of a Credit Card:
- Cost of Credit Card: There are many fees and APRs levied on a credit card holder for carrying on several credit card activities which makes up the overall cost of the card.
- Credit Limit: A Credit limit is a maximum amount that you can spend on a credit card. This limit is different for different credit cards.
- Type of Credit Card: There are various types of credit cards available suiting the needs of distinct customer segments like a credit card for travel, shopping, lifestyle expenses, entertainment, fuel, etc.
- Rewards and benefits: The rewards are the advantages you get on using a credit card for different transactions. The rewards earned on a credit card can be in the form of miles, points, cashbacks, vouchers, coupons, etc.
A line of credit is a form of debt that allows you to borrow money for any purpose up to a certain amount, subject to a rate of interest. There is a certain limit up to which you can borrow money and just pay interest on the amount you borrow. You’ll need to speak with your bank or financial institution to establish a line of credit. You can start by inquiring about any account-opening fees, such as a registration or administrative fee, etc. You can get money from your line of credit once it’s been approved with a certain limit
Features of a Line of Credit:
- Interests and fees: A fee is usually charged by the bank or financial institution for opening a line of credit. The charge would normally include the costs of completing the application, security screening, legal expenses, collateral arrangements, and registrations, among other things.
In most cases, no interest is charged on a line of credit until the consumer uses a portion or all of the credit capacity.
- Types of LOCs: The different types of Line of Credits are:
a) Secured LOC: In a secured line of credit, you are required to pledge something (real estate, automobile, etc.) as collateral to the bank if in case you did not pay back the amount taken as a loan.
b) Unsecured LOC: An unsecured line of credit is a credit instrument with a variable rate that gives you access to money as needed without any collateral.
c) Revolving LOC: A revolving line of credit allows a borrower to withdraw funds up to their credit limit regularly. It functions similarly to a credit card and requires a monthly payment.
d) Close-end LOC: Closed-end credit refers to debt instruments purchased for a certain purpose and a specified period.
- Utilization of LOC: You can utilize your approved line of credit in the following ways:
a) Use your line of credit to write a check
b) Withdrawing cash from the ATM.
c) Paying bills using LOC.
d) Use internet banking to deposit funds into your checking account.
- Benefits: Following are the benefits of a line of credit:
a) Low rate of interest.
b) The borrowing limit is higher.
c) 24*7 constant access to funds.
d) Comparatively lower cost.
e) Option for a flexible payback schedule
Additional Reading – Your Guide to Secured Credit Cards