Credit Cards vs. Line of Credit

Credit cards and lines of credit are similar in that they’re both forms of “revolving credit,” meaning you can borrow and repay money on an ongoing basis. But they aren’t identical. In general, a line of credit is harder to get but will carry a lower interest rate.

Amortization

The paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or loan.

Annual Fee

The once-a-year cost of owning a credit card. Some credit card providers offer cards with no annual fees. The annual fee is part of the total cost of credit.

Annual Percentage Rate (APR)

The yearly interest rate charged on outstanding credit card balances.

Balance

An amount of money. In personal banking, balance refers to the amount of money in a savings or chequing account. In credit, balance refers to an amount of money owed.

Cash Advance

A service provided by many credit card issuers allowing cardholders to withdraw a certain amount of cash, either through an ATM or directly from a bank or other financial agency.

Credit Bureau

A reporting agency that collects information on consumer credit usage. There are currently three main credit bureaus in the United States: Equifax, Experian, and Trans Union

Credit Card

A card issued by a financial company giving the holder an option to borrow funds, usually at point of sale. Credit cards charge interest and are primarily used for short-term financing. Interest usually begins one month after a purchase is made and borrowing limits are pre-set according to the individual’s credit rating.

Grace Period

The time a borrower is allowed after a payment is due to make that payment without adding to the interest owed.

Interest

The charge for the privilege of borrowing money, typically expressed as an annual percentage rate.

Introductory Rate

Credit card issuers may offer low introductory annual percentage rates as special promotions. Be sure to fully understand how long the introductory rate will last and what the standard rate will be.

Line of Credit

A line of credit is a lending arrangement between a financial institution (usually a bank or credit union) and either a business or an individual. A credit account is extended to the borrower with a maximum credit limit to borrow against. A line of credit is different than a mortgage or auto loan because the money does not have to be used for a pre-specified purchase. It is almost like a credit card, only without the plastic. Lines of credit come in both secured and unsecured forms, and there can be significant differences between the two.

TIP: When any loan is secured, it means that the credit grantor has established a lien against an asset that belongs to the borrower. This asset becomes collateral, and it can be seized or liquidated by the lender in the event of default. Perhaps the most common example of this is a home mortgage, in which the bank agrees to lend you a large sum of money against the property itself.

From the lender’s perspective, secured lines of credit are attractive because they provide a way to recoup the money in the event of non-payment. For individuals or business owners, secured lines of credit are attractive, because they typically come with a higher maximum credit limit and significantly lower interest rates than unsecured lines of credit.

One very popular secured line of credit is a home equity line of credit (HELOC). With a HELOC, money is borrowed against either the value of the equity in the home or a second mortgage, each of which establishes a lien position for the creditor.

Unsecured Line of Credit

Technically, credit cards are the most common type of unsecured credit line. No asset is acting as collateral against the lent funds in an unsecured line of credit, so the lending institution is assuming a much larger risk.The additional risk to the creditor makes unsecured lines of credit difficult to approve. However, none of the borrower’s major assets are subject to seizure upon default.

Unsecured lines are particularly difficult for businesses that want to open lines of credit for possible capital expansion. In this circumstance, the funds are borrowed against the possibility of future business returns. Lenders usually only consider such a loan to established companies with excellent reputations as debtors.

Lenders attempt to compensate for the increased risk of unsecured loans by limiting the amount of funds that can be borrowed and by charging higher interest rates as a premium on their assumed risk.

Both secured and unsecured lines of credit have advantages over regular loans: flexibility of purchases, no set monthly payments or regular payment dates, and no interest charged on unused credit in the account. If you opt for a revolving credit line, any repayment immediately makes those funds available for credit again, which is useful if you want a long-standing, multifunctional credit account.

Loans

Borrowed money with certain conditions laid out between individuals or parties.

Minimum Payment

The lowest amount of money that you are required to pay on your credit card statement each month in order to keep the account in good standing. Failure to do this results in late fees and bad repayment history on his credit report.

Overdraft Payment

A banking service that allows you to link your chequing account to your credit card, thereby protecting you from overdraft penalties or bounced cheques in the case of insufficient funds.

Payday Advance: (Also known as payday loan, salary loan, payroll loan, small dollar loan, short term loan, cash advance loan) A relatively small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck.

Payment

An amount paid or payable.

Breakdown of a borrowing payment.

Payment = Interest + Principal

The interest portion is the fee charged for borrowing money and the principal portion is repaying the initial loan amount.

Term

Fixed, non-cancellable period for which a lease agreement is in force.