Personal lines of credit and credit cards both offer a flexible way to borrow money, and both are considered revolving credit. However, there are key differences in how each one operates. In this article, we’ll explore these differences to help you make informed decisions about your borrowing options. Additionally, we’ll touch on how collection agencies can take money from your bank account if you default on your payments.
- Interest Rates:Personal lines of credit generally have lower interest rates compared to credit cards. This means that if you need to borrow money for an extended period, a personal line of credit may be more cost-effective. Credit card interest rates can be quite high, especially if you don’t pay off the balance in full each month.
- Payment Flexibility: Credit cards have a monthly billing cycle, and you’re required to make a minimum payment each month to avoid late fees. Personal lines of credit, on the other hand, have more flexible repayment options. You can make interest-only payments during the draw period or choose to make larger payments to pay down the principal balance more quickly.
- Access to Funds: With a credit card, you have instant access to your available credit. You can make purchases, get cash advances, or even pay bills online or over the phone. A personal line of credit may require you to transfer funds to your bank account before you can access them, which could take a day or two. This could be a disadvantage if you need money immediately.
- Credit Limits: Credit card limits are typically lower than personal lines of credit. A personal line of credit can offer a higher borrowing limit, which may be helpful if you need a larger sum of money for a significant expense, such as home renovations or debt consolidation.
- Fees: Credit cards often come with various fees, such as annual fees, balance transfer fees, and cash advance fees. Personal lines of credit may have fewer fees or lower fees overall. Some banks even offer personal lines of credit with no annual fees, making them a more affordable option for borrowers.
- Impact on Credit Score: Both credit cards and personal lines of credit can affect your credit score. However, the way they impact your score differs. Credit card utilization – the percentage of your credit limit that you’re using – is a significant factor in your credit score. High utilization can negatively affect your score. On the other hand, personal lines of credit usually have a lower impact on your credit utilization, as they are considered installment loans.
- Cash Advances :Credit cards often charge a fee and a higher interest rate for cash advances. Additionally, interest on cash advances begins accruing immediately, unlike regular purchases that may have a grace period. Personal lines of credit, however, do not have these additional fees and interest charges for accessing cash.
- Rewards and Benefits: Credit cards often come with rewards programs, such as cashback, points, or travel rewards. Personal lines of credit typically do not offer these types of rewards. If earning rewards for your spending is important to you, a credit card may be a better option.
- Default Consequences: If you default on your credit card or personal line of credit, your account may be sent to collections. Collection agencies can take money from your bank account through a process called garnishment. This can only happen after the agency obtains a court order, but it’s essential to be aware of this potential consequence.
- Secured vs. Unsecured: Most credit cards are unsecured, meaning they don’t require collateral. Personal lines of credit can be either secured or unsecured. Secured lines of credit require collateral, such as your home or car, which can be seized by the lender if you fail to repay the loan. Unsecured lines of credit do not require collateral, but they may have higher interest rates and stricter eligibility requirements.
Personal lines of credit and credit cards offer flexible ways to borrow money, but they have key differences in interest rates, payment flexibility, access to funds, credit limits, fees, impact on credit score, cash advances, rewards and benefits, and secured vs. unsecured options.
It’s important to carefully consider these factors and choose the option that best suits your needs and financial situation. Additionally, it’s crucial to make your payments on time to avoid defaulting on your account and potentially facing consequences such as garnishment by collection agencies.