THE GLOSSARY · CREDIT
Line of credit
Cheaper than a card, except on one point: it has no grace period. Which makes it better for what you carry, and worse for what you pay off in full.
A line of credit is a reserve of money you can draw on at any time, on which you pay interest only on what you have drawn. A credit card does the same. Three differences separate them, and they do not all point the same way.
The rate. A line typically runs around 9%, a card around 19.99%. On $1,000 carried for three months:
| Instrument | Rate | Interest over 3 months |
|---|---|---|
| Credit card | 19.99% | $50.81 |
| Line of credit | 9.00% | $22.67 |
The grace period. This is where the card takes the advantage back. A purchase put on a card and paid in full on the due date costs nothing: federally regulated institutions must give at least 21 interest-free days. A line has none. Interest runs from the day you draw, even if you repay the following week.
The minimum payment. On a card it includes some principal. On a line it is often limited to the interest — you can pay your minimum for years without the balance moving a dollar.
And one detail that weighs: a line has no end date. A loan extinguishes itself, a line only does when you decide it does — which our entry on amortisation makes visible by comparing principal with interest.
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