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.
By the Yoseri News desk · · 1 min read
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.
Where the figures come from
The maths in this article starts from the assumptions written above. Run them again with your own figures — you should land on the same numbers.
Yoseri News is an educational publication. Nothing in this article is investment advice, a recommendation to buy or sell, or tax advice. Yoseri is registered as neither an adviser nor a dealer with any market authority.