Do you think credit cards and personal credit lines are basically the same?
They have vast differences in interest rates, EMI options, and pros and cons. Many people think credit cards and personal lines of credit are the same because they both are revolving credit accounts. But they are vast differences in interest rates, additional charges, and use.
In this article, you will understand what sets them apart and what you should opt for by weighing their pros & cons.
Personal LOC
A personal credit line is a type of revolving line of credit. When you apply for a personal credit line you’re given access to a certain amount of money which can be borrowed within a specific period. When using a personal credit line, you have to pay interest only on the amount you use. When using a personal credit line, your interest starts accruing on the balance you withdraw until the day you repay that amount.
There are two types of Personal Credit lines: Secured and Unsecured Credit Lines.
In case of a poor credit score, you may have to opt for a secured credit line where you would have to reserve an asset as collateral. And if you have a credit score of 600+, your lender would trust you enough to provide an unsecured personal loan.
Pros
- Interest charged only on the amount borrowed: When you use a personal credit line, you only have to pay interest on the amount you borrow rather than the whole loan, as opposed to personal loans, which have set EMIs regardless of whether you use the amount or not.
- Cheaper than credit cards: The interest rates of personal credit lines are lower than credit cards. They don’t have additional charges like services fees, cash advance fees etc like credit cards.
- Consolidate high-interest debt: You can use a personal line of credit to pay off other debts that have higher interest rates than your credit line, such as car loans, student loans, or credit card debt.
Cons
- High-interest rates: In the case of unsecured personal credit lines, the interest rates are higher than other available secured credit lines like HELOCs.
- Impulse buying: Having a personal credit line can lead to splurging, to avoid impulse buying you must stick to a budget and only use it for necessary expenses.
- Additional fees: Personal credit lines come with additional fees like maintenance fees, origination fees and other charges.
Credit card
You can use a credit card as a short-term loan from a lender to cover purchases and other expenses. They are used for expenses that don’t require cash payment. They have a credit limit, and you must pay the amount you’ve used at the end of each billing cycle. If you don’t pay the balance in full during the interest-free grace period, you will be charged interest that ranges from 24 to 42%.
Pros
- Rewards: Credit card companies offer reward points and benefits like No-Cost EMI offers, cashback offers, lounge access at airports, priority check-in at airports, insurance cover etc to entice customers to buy their credit cards.
- Universally accepted: Credit cards are universally accepted and can be used in any country. This is a great benefit for students who study abroad and travel lovers.
- Buyer Protection: Suppose you ordered a desk online and paid with your credit card. And the desk never arrives. Instead of having a heated argument with the seller, request your credit card company to raise a dispute. This is called ‘Chargeback’.
Cons
- Impulse buying: Just like personal credit lines, credit cards can lead to impulse buying if not used wisely.
- Hidden charges: Credit cards come with additional charges like maintenance charges, surcharges cash advance fees, exceeding limit fees, foreign charges and 18% GST charges.
Credit card fraud: Technology has made credit card fraud a piece of cake for thieves. If someone steals your credit card or they know your credit card details, it would be a cakewalk for them to use it without your knowledge. Though credit card companies waive the charges if the fraud is proven, the procedure would be a serious headache.
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