Personal Line of Credit vs Credit Card

June 22, 2009 by TFB

My personal line of credit is all set up. I tested it by making a transfer from it in the morning and transferring the money back in the afternoon. I don't think I will owe any interest that way. It worked as advertised.

A personal line of credit and a credit card are both unsecured open-end ("revolving") credit products. In a nutshell, a personal line of credit is like a credit card without a grace period or rewards, but with better cash advance features. Lines of credit are very common for businesses whereas credit cards are more common for individuals (there are also business credit cards). Based on my own personal line of credit with Wells Fargo and my three credit cards from American Express, Chase, and FIA Card Services (Bank of America), I summarize the differences in the table below. Red indicates inferior product features.

  Personal Line of Credit Credit Card
Secured No No
Document income for application Yes No
Purchase Yes, by check or card Yes
Grace Period No Purchase: 20 – 56 days 
Cash advance: No
Credit Limit Lower Higher
Credit limit for cash advance 100% 20%
Cash Advance Fee None 3%, min. $10
Rewards No Purchase: Yes
Cash advance: No
Annual Fee Waived No
Interest Rate Prime + 8.5% Purchase: Prime + 6-10%
Cash Advance: Prime + 16-22%

Generally speaking, a credit card is better for purchases. A personal line of credit is better for cash advance. Banks don't advertise personal lines of credit as much as they do for credit cards. Perhaps that's why more people don't know about it.

Because I, like half of all credit card users, and I hope 100% of my readers, don't carry a balance on my credit cards, I never paid attention to the APRs on my cards. Now that I think about it, I wonder why credit card companies are so much against cash advance. First they give you only 20% of the purchase credit limit for cash advance. Then they charge you 3% cash advance fee plus a much higher interest rate, with no grace period. They obviously see cash advance as more risky than purchases. Right now you can charge almost everything on a credit card. What can you do with a cash advance but you can't charge as a purchase? I can think of paying rent, paying other loans, and paying taxes, although it is possible to pay mortgage with a credit card for free. What else?

Not all banks offer personal lines of credit (at least they don't advertise it online). Almost every bank offers Home Equity Loan, Home Equity Line of Credit (HELOC), auto loans, and loans for motorcycle, RV or boat. These are all secured loans. For personal, unsecured revolving loans, some banks basically just push the credit cards. Using my Top 10 Banks list, here's what I found from each one.

  Offers unsecured personal line of credit?
Bank of America No
Chase No
Wells Fargo Yes
Citibank Yes
PNC Bank Yes
U.S. Bank Yes
SunTrust Bank No
Citizens Bank No
Capital One Yes
Regions Bank Yes

Four of the top 10 banks don't offer unsecured personal line of credit or at least they don't advertise it on their web site. Note the top two banks, Bank of America and Chase, are also the biggest credit card issuers. I also checked a few credit unions around me. They all offer the personal line of credit product. Large, popular credit unions like PenFed, Navy Fed, and Alliant CU have it too. I guess by tradition personal line of credit is more common in credit unions than in banks.

Elsewhere on the web:

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Comments

4 Comments on Personal Line of Credit vs Credit Card

  1. Wai Yip Tung on June 22, 2009 | permalink
     

    Why would want that? HELOC interest is around 2.5% right now.

  2. TFB on June 22, 2009 | permalink
     

    I chose an unsecured line over a HELOC because a HELOC will complicate my mortgage refinance in the future. I explained why in a comment to my previous post.

  3. Rick on June 22, 2009 | permalink
     

    TFB,

    I applied for $1,500 and rec'd an instant (+) answer at Navy Fed for a NAVchek® Line of Credit. I wasn't considering the benefits you've mentioned but wanted the overdraft protection for my checking account. I picked $1,500 because my largest payment each month is my mortgage and if I needed to reallocated those funds elsewhere, I could always make the mortgage payment. (re. Emergency-Proof Your Emergency Fund). – Rick

  4. cameron on October 9, 2009 | permalink
     

    There are much better rates than primes + 8.5

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