Something in Common
When you have a line of credit with a bank, it means the bank will let you borrow money up to the limit on your line. With a $10,000 line of credit, you can borrow up to $10,000. Unlike with a standard loan, you don't have to borrow all the money at once; you just take what you need when you need it, and you pay it back over time. If that sounds like how a credit card works, that's because it is. Strictly speaking, a credit card is simply a tool for accessing a line of credit. However, in common usage, "line of credit" usually refers to a lending arrangement set up directly with a bank.
Perhaps the most substantial difference between lines of credit and credit cards is the interest rates they charge. Credit card rates are significantly higher. For example, according to Bankrate, the average credit card interest rate at the time of publication was about 13 percent for cards that charged a fixed rate and 15.6 percent for those with a variable rate. Lines of credit secured by home equity, by contrast, were hovering around 4 percent, while unsecured lines of credit -- those without collateral -- were somewhere in the middle. If you had $1,000 outstanding for a year on a credit card at 13 percent, compounded daily, it would cost you about $139 in interest. On a line of credit at 4 percent, also compounded daily, you would pay about $41.
A big reason lines of credit are cheaper than credit cards is that the standards for getting a credit line are higher. Apply for a line of credit at a bank, and you'll go through an in-depth credit review that's a lot like applying for a mortgage. "Preapproved" credit card offers, on the other hand, pour into mailboxes across the country every day. Not everyone can get a credit card, of course, but far more people can get them than can open a line of credit. Credit card issuers accept higher risk, and they charge higher interest because of it.
Credit cards are widely accepted, which is one of their big selling points. But convenience can be a problem with lines of credit, depending on how the bank allows you to access the funds. If you have to transfer money to your bank account by going online or calling your bank, that limits your access to your credit line. Some banks let you draw on a credit line with checks or even a debit card. But limited access to a credit line isn't necessarily a bad thing. A line of credit is still borrowed money, and you can get in just as much trouble with a credit line as with a credit card if you borrow more than you can afford to repay.