The advantages of a line of credit over a credit card (2024)

FAQs

The advantages of a line of credit over a credit card? ›

Using a line of credit to do a DIY debt consolidation can be a good strategy to reduce your debt load, as consolidating your debts allows you to pay them more quickly, with a line of credit typically offering lower interest rates than traditional credit cards.

Using a line of credit to do a DIY debt consolidation can be a good strategy to reduce your debt load, as consolidating your debts allows you to pay them more quickly, with a line of credit typically offering lower interest rates than traditional credit cards.

The main advantage of an LOC is the ability to borrow only the amount needed and avoid paying interest on a large loan.

Potential downsides include high interest rates, late payment fees, and the potential to spend more than you can afford to repay.

A line of credit gives you access to money “on demand” and can help you with expenses like a home project or unexpected car maintenance. A line of credit is typically offered by lenders such as banks or credit unions, and, if you qualify, you can draw on it up to a maximum amount for a set period of time.

A line of credit is a type of loan that lets you borrow money up to a pre-set limit. You don't need to use the funds for a specific purpose. You may use as little or as much of the funds as you like, up to a specified maximum.

You can also pay bills or withdraw cash from your line of credit. If you're interested in discussing how a line of credit can help you achieve your long-term goals, reach out to a CIBC advisor to learn more.

Replenishing balance: When you pay back money within the draw period it becomes available again to borrow. A powerful financial tool: The money from a personal line of credit can be used for just about anything, so it can be a powerful way to pay down higher-interest debt.

To land one, you'll need to present a credit score in the upper-good range — 700 or more — accompanied by a history of being punctual about paying debts. Similar to a personal loan or a credit card, an unsecured personal line of credit gets bank approval based on an applicant's ability to repay the debt.

Because you can usually get a line of credit at a lower interest rate than your credit card, using a line of credit to pay off credit card debt can reduce your total interest costs and reduce the amount of time you're in debt.

Is it bad to max out your line of credit? ›

And if you have a history of maxing out your card, you should be aware that more credit can lead to more debt. An additional credit limit can be helpful for affording your expenses, but it can also be harmful if you overspend.

If you have used your line of credit, you will have to pay it off in full before you can close it.

Increasing your credit limit could lower your credit utilization ratio. If your spending habits stay the same, you could boost your credit score if you continue to make your monthly payments on time. But if you drastically increase your spending with your increased credit limit, you could hurt your credit score.

The short answer is that they don't take a traditional income and most of their wealth is in highly appreciated assets – like shares in the company they founded. They don't need to sell stocks, which would trigger capital gains taxes. Instead, they can take loans against their shares.

For example, if you have a credit line with a $10,000 limit, you can use part or all of it for whatever you need. If you carry a $5,000 balance, you can still use the remaining $5,000 at any time. If you pay off the $5,000, then you can access the full $10,000 again.

A line of credit gives you ongoing access to funds that you can use and re-use as needed. You're charged interest only on the amount you use. A line of credit is ideal when your cash needs can increase suddenly, such as with home renovations or education.

Both a credit card and a line of credit let you borrow money to a pre-set limit. And you may be charged interest depending on how quickly you repay what you borrow. A line of credit may offer a higher credit limit and lower interest rate. But credit cards earn rewards and can be used for in-person and online purchases.

Since a credit line is treated as revolving debt, both your maximum credit line limit and your balance affect your credit utilization. Your payment history is also reflected on your credit report, which could help or hurt your score depending on how you manage the account.

The Bottom Line

Though lenders will each have their own qualification requirements when it comes to credit scores, you could get approved for a line of credit if you have a score of 660. However, your chances of approval (and getting better interest rates) increase if your score is closer to 713 and above.

Lines of credit and credit cards both have credit limits. But how you access the money differs. With a line of credit, you can usually access the account using checks, bank transfers or a card. On the other hand, a credit card gives you access to the credit limit simply by swiping, tapping or dipping.