Lines of credit vs credit cardsFebruary 17, 2014
Most people don’t know this, but there is actually a very major difference between lines of credit and credit cards. Both work on the same principle of borrowing money and repaying it back with interest, but both adopt very different strategies in order to assist the individual in question. If you have a financial gap that needs to be fulfilled, analyzing these two options is a great idea. Here’s a brief comparison between the two:
Lines of credit
Lines of credit are of two types; secured and unsecured. As is obvious, the interest on secured lines of credit is much less than that of unsecured ones. A line of credit is basically a kind of loan that doesn’t provide you with a large amount of money in one go that you can repay. Similar to the concept of a credit card, you can borrow money whenever you need, but the interest rates are significantly lower than that of credit cards. The limits also vary. In most lines of credit, interest is only charged on the amount of money that you have actually borrowed. There are certain lines of credit in which the money can only be borrowed in a fixed period, referred to as the draw term. Usually, lines of credit have a variable rate of interest, derived on the prime rate as well as a margin. Obviously, when it comes to getting a line of credit, certain factors need to be analyzed. Your credit history matters significantly, while the company will analyze your past income before extending a line of credit.
The concept of a credit card is much simpler than that of a line of credit, though not entirely different. Usually, credit cards are offered by banks in tandem with credit card companies. You can borrow money up to a certain limit from the bank, and then pay it back within a set period of time. The important thing here is to ensure that payments are made on time, because otherwise, the interest rates tend to accrue on the principal amount, and within a very short amount of time, you will have to pay a lot more money than you initially borrowed. This is one of the primary reasons why people tend to accumulate such high debts on their credit cards. One good thing about using credit cards is that you get a lot of discounts from numerous places/ eateries, and they are globally accepted.