The Difference Between a Line of Credit & a Credit Card

When an individual realizes he has a need for money without the means to supply it, he typically resorts to obtaining some form of credit which allows him to borrow from a lender. There are several available options for a potential borrower to choose from, including a credit card company and his bank, which can issue a line of credit. No matter which he chooses, he should be careful in managing the amount he uses.

Line of Credit

A line of credit (LOC) is an extension of money, similar to a bank account, which a bank grants to an eligible applicant. It is a revolvable source of credit, meaning that when the balance is repaid, the owner has the right to the entire balance of the account. Interest only accrues on funds that the borrower withdraws from the LOC. Banks offer several different types of LOCs, which may be secured or unsecured.

Secured versus Unsecured Line of Credit

An unsecured line of credit is not backed by any type of asset, with approval usually only relying on the potential borrower's credit score, history and existing debts. Interest rates on an unsecured LOC are usually higher than a secured LOC. The reason for the higher rate stems largely from the fact that a secured loan is at least partially guaranteed by an underlying asset, such as a home or a portfolio. Should the person fail to make timely payments toward amounts withdrawn, the bank reserves the right to collect by seizing and selling the asset.

Credit Cards

Credit cards are an available option for borrowing, except that the institution supplying the funds does not necessarily have to be a bank. Interest rates on credit cards are generally much higher than those on a line of credit when the customer fails to pay in a timely manner. Secured credit cards require the customer to pay a deposit; unsecured cards do not. Approval depends on the customer's credit score, history and ability to repay.

Managing Debt

Whether a person has a line of credit from his banking institution or a credit card from an issuing company, it is important that he makes payments in a timely manner. Interest rates on each form of debt rise in accordance to missed payments. For many credit cards, this interest rate will not decline after the initial increase. Failing to pay a HELOC could result in the loss of the person's home.