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Should I use a Personal Line of Credit or a Credit Card?

Chris Gottschalk

Chris Gottschalk About The Author

Jun 16, 2020 6:00:00 AM

You probably know about personal loans and how versatile they can be, but you might not know about personal lines of credit. Personal lines of credit are similar to personal loans in that you can borrow money from a financial institution for a variety of purposes, from funding a home remodeling project to filling in the financial gaps between irregular paychecks.

However, a personal line of credit lets you borrow up to a certain limit determined by the financial institution. You can draw any amount of money you want up to your credit limit and use the money in any way you see fit. Once you repay the principal you’ve borrowed, you can borrow it again if you need to.

If you think this description sounds a lot like a credit card, you’re right. Personal lines of credit and credit cards are very similar. They’re not the same, though, and knowing when to use one over the other can help put you on the path to financial success.

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Use a Personal Line of Credit When You Need Cash on Demand

While there are a lot of small differences between a credit card and a line of credit—how much you’ll be able to borrow, whether there’s a grace period or even how much you can spend at one time—there is one huge difference that sets a personal line of credit apart from a credit card.

credit card in hand | First Alliance Credit UnionWith a personal line of credit, you can draw up to your credit limit in cash. A credit card, on the other hand, will only let you draw a certain percentage of your credit limit in cash at a much higher interest rate than normal purchases.

In practical terms, this means you have fewer restrictions on how you can use your personal line of credit. You can use it to make a down payment on an auto loan, buy items like antiques from a seller who doesn’t accept credit cards or even pay off your existing credit card debts to consolidate them.

Use a Personal Line of Credit When You Want to Buy a Big-Ticket Item

Personal lines of credit typically have higher credit limits than credit cards. This makes them ideal when you want to buy a big-ticket item, such as remodeling your home, buying new appliances or getting some major repair work done on your car.

Use a Personal Line of Credit When You Need More Time

While you might be able to use a credit card for big-ticket purchases, a personal line of credit should give you a lot more room to breathe. If you can’t repay the amount you’ve borrowed at the end of each month, you’ll want to use a line of credit.

Percents and iphone | First Alliance Credit Union Credit cards, for all their convenience, will cost you a lot if you have an outstanding balance on your card at the end of the month. Even worse, that amount can be compounded, so you’ll end up having to pay interest on the interest your original balance earned.

In contrast, a personal line of credit is meant to be paid off gradually. Even though an APR will apply to the amount you have borrowed, it will be more manageable than a credit card’s APR.

Use a Credit Card When You Want to Get Rewards

At this point, you might be wondering if credit cards have any advantages over a personal line of credit.

In fact, they do. Credit cards offer rewards for using their cards, from free miles to low introductory rates and even cash back if you get enough points or make the right kind of purchases.

These rewards are exciting, and if you use your credit cards properly you can end up saving quite a bit of money. This is why you’re better off reserving credit cards for everyday purchases, especially when you know you can pay off the balance each month.

Get a Personal Line of Credit Through First Alliance Credit Union

Personal lines of credit and credit cards are both very useful tools, provided you have the discipline to use them responsibly. In order to figure out which one will work best for you, consider whether you are looking to buy a big-ticket item, whether you need time to repay the amount you borrow and whether you’ll need to get any of the amount you want to borrow in cash.

If you’d like to get either a credit card or a personal line of credit, become a First Alliance Credit Union member today. We offer credit cards with no annual fees and low interest rates, as well as personal line of credit that also offers no annual fees, and a low interest rate as well as no funds transfer fees and the ability to connect with your checking account to cover overdrafts.

Want more information about using credit cards? Listen to our Good Money Moves podcast about how to use credit cards responsibly.

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