Credit cards, lines of credit or credit lines, and short-term loans, all work very differently from each other. Each has its working procedure. Everybody these days carries credit cards and very well knows how to use them. But very few know about credit lines. They both can have the same type of revolving credit. Both of them allow you to borrow up to a certain amount.
A credit card allows you to access a credit line while you can open a line of credit without any card. It is one of the differences between the two of them. All credit lines are not credit cards but all credit cards are lines of credit. Apart from these two, short-term loans are a great way to cover your temporary personal or business needs.
Let us talk about the three of them in brief-
A credit card is issued to you by a bank which allows you to draw a credit line. By this, you can make payments online or in person. You have to pay interest over the card whose limit is already defined. You can make a payment by swiping the card on the terminal or enter the number of the card along with the security code and expiry date.
How a credit card works
- You receive a statement for every billing cycle.
- There is no need to pay any interest if you pay your bill on time which is why anyone can use it conveniently.
- If you do not pay at all, you may pay interest rates as high as 40%.
- Some credit cards even allow you to withdraw cash from an ATM as you can do with a debit card.
Your credit card can affect your credit score. If you are applying for a new credit card, then you have to face a hard inquiry. It can lower your score. Pay your bills on time and the score will increase.
Credit line or Line of Credit
A financial product that allows you to borrow money any time you want is a Line of credit. There is a limit up to which you can borrow and then you repay the amount with interest. Draw from the credit line whenever you need to. There are several types of credit lines like business, personal, and home equity. Its main advantage is that it is flexible. Line of credit is either secured or unsecured. In secured LOC, you have to keep collateral while unsecured LOC does not require any. The rate of interest is usually high in unsecured LOCs.
Working of credit line
- The issuer will give you checks on which you can write to have access to your line of credit.
- You can get the money which you have in your bank by requesting a transfer either by phone or on your bank’s website.
- Your bank or credit union can automatically draw a credit line to cover overdrafts if you want.
Try and make your monthly payments on time to increase your credit score.
It is a type of loan which you can obtain to fulfill a temporary business capital or any personal requirement. If you have less cash flow or need capital to start a small business, then these types of loans are perfect for you. Small businesses that are not yet eligible for a credit line can go for it. They require quick payments. The repayment of such loans differs from typical loans.
How do they work?
- The credit limit for these loans is lower than the credit line.
- You will have to pay back the amount daily or in a week.
- Annual Percentage Rate(APR) is one of the important things to consider, before applying for a short-term loan.
While comparing the three of them, we can see that each has its benefits and downfalls. We can see credit cards and credit lines both have certain limits to the amount you can use. With a credit card, if you pay the amount on time, no interest is charged but with a credit line you have to pay interest and there are certain consequences if you do not pay interest. The interest can be very high if you fail to pay back the amount in all three cases. Short-term loans require fast payment while you can make monthly payments in credit cards and credit lines. Choose wisely according to your requirements.