The key differences between a line of credit and a credit card are:
- A line of credit does not have fees for cash advances, cash can be taken out just like making a purchase without extra cost.
- A line of credit does not have a grace period. You are charged interest for the money you take out starting immediately.
A line of credit gives you certain opportunities that you would not otherwise be able to accomplish with a credit card. Primary amongst these is the ability to transfer a debt from one credit account to your line of credit without incurring a fee.
Lets explore some of the ways you can use a line of credit to save money. Lets say your line of credit is 12% interest and has a limit of $6000. If you owe $3200 on your Visa which charges 23% interest you are paying $61.33 every month in interest. Now if you pay your Visa with your line of credit you are now paying 12% which is only $32.00 interest. You are now saving over $30 a month just by moving it over.
Now, lets say there is a $1200 couch you wanted to buy, and it has a 90 day interest free period on it if you use your merchant card which charges 29% interest. You only get your interest free status if you pay your card balance in full before the 90 days is out, otherwise you pay full interest starting at the time of purchase. So lets leave it on our merchant card for 85 days, then pay it in full with our line of credit. That is 85 days worth if interest we do not have to pay, that saves the $34 that our line of credit would have charged interest if we just bought it from the line of credit right away.
This can also be done with the 25 day grace period that many credit cards offer. Please keep in mind that you will not benefit from the 25 days grace unless you pay off your whole credit card balance by the due date. Just paying the amount of your purchase is not enough.
Another advantage of a line of credit is that when you make a large purchase on your credit card it "exercises" your credit, showing a usage that credit companies like. When you transfer this balance to your line of credit you are in effect exercising your credit twice for one purchase. Both your credit card lender and your line of credit lender see you spending the $1200 that you used on the couch, but they have no way to know they are the same purchase. This helps your credit rating.
Not all lines of credit are helpful in reducing what you pay. There is a class of lines of credit that charge very high interest rates but have low monthly payments. They might make you an offer where they give you a line of credit at 32% interest if you transfer the debts from your existing cards to your line of credit then cancel them, they make this sound appealing by showing how your minimum payments will be less if you do all your debt with them.
This is true, they will offer you a lower monthly payment. But lower monthly payments and higher interest equals paying far more. This company is trying to get your debt so they can make money off of you. You cannot use such a line of credit to reduce your overall costs, only to reduce your monthly payments. I don't recommend it, if you are in that dire of need then try credit counseling through reputable organization.
