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    Need Money? Line of Credit vs Credit Card - How To Do It

    Line of Credit vs. Credit Card

    Don't let the semantics confuse you. You're buying money. Lending, borrowing, investing and credit loans are all simply different mechanisms for selling and buying money.

    The “interest” is how much it costs you to buy. The payment of your purchase occurs at a predetermined point in the future.

    Here’s what you need to know about business lines of credit:

    Firstly, Remain clear

    • You're buying money
    • They're selling money
    • It's a sales business
    • You're the customer 
    • They're the merchant

    What remains to be understood is how each mechanism operates. Being clear on this will enable you to take advantage of the system.

      What is a Line of Credit?

      A line of credit loan is an automatic recurring purchase of money up to a specified limit which you will pay for at an agreed point in time in the future.

      Some lenders will use your current existing banking relationship to establish trust and once established, you can buy money as frequently as you like. 

      You only pay interest on the money you borrow or bought. However, you may be charged a fee each time you use the loan. Unpaid purchases of money or interest simply revolve into the next billing period.

      There are two types of automatic recurring systems of buying money or line of credit: 

      1. Secured

      A secured line of credit is when you pledge objects of value such as business equipment or personal assets, like an automobile or home to lower the risk for the institution selling you money.

      Secured lines of credit loans are less risky for lenders. They have better terms: lower interest rates, fixed-rate and variable-rate, and longer terms of availability. Secured lines are much riskier for borrowers or buyers of money because they put your assets at risk.

      2. Unsecured

      An unsecured line of credit does not require a security pledge. This means there is a higher risk for the lender. As a result, to mitigate their risk, the interest rates or the price of the money you buy is often higher. 

      In addition, their policy requirements are often more complex. They may require a cosigner which puts whomever that is at risk if you default. 

      How Does a Line of Credit Work?

      Most lending institutions offer a combination of physical and electronic draw options: 

      • Physical Transactions: Your loan issuer or sales can give you checks to write. You may also be able to draw funds via in-person or over-the-phone transactions. 
      • Online Transactions: You can arrange to electronically execute draws (Receiving the loan or part of it which in effect is a purchase of money) via your personal computer, laptop, or smartphone.

      There are two ways in which vendors offering credit lines determine the cost of the money you will be buying.

      1. Variable Rate

      A variable rate is an interest rate or the actual cost of the money you borrowed or bought that fluctuates over time. It fluctuates because it is based on the governmental understanding of what the interest rate should be which, in turn, is dependent on many economic market factors that change. The interest rate that fluctuates is called Prime Interest Rate.

      For example: let's say that you need $1,000 to start a business. Professional Banana Lenders offer you a price of variable interest rate at prime plus 5%. That means that the interest rate or the cost of the money you are buying equals whatever the prime rate is plus 5%. If the prime rate is 4%, then your loan costs 9% of the amount of money you needed or bought in the first place.

      2. Fixed Rate

      A fixed rate of interest is when the amount you pay for having bought the money or the interest rate does not fluctuate. It remains the same regardless of what is happening in the financial market economy that would affect the cost of the money or interest rate in the variable interest rate structure.

      What is a Credit Card?

      A credit card is a type of line of credit or financial mechanism that sells you money very easily and instantaneously.
      This purchase of money from the company that issued the card happens in real time as you buy something in-person, over-the-phone, or online. They are also a form of a personal line of credit. 

      • Most credit cards are unsecured 
      • They carry high interest rates. 
      • Those with the lowest interest rates and most flexible payment terms are reserved for borrowers with the highest credit scores. 
      • You don't need an exceptional credit score to get a credit card. 

      How Does a Credit Card Work?

      Making purchases with a credit card can be done by physically swiping or inserting the card in a terminal. You can also use it to purchase items by verbally communicating the card’s number, expiration date, and security code over the phone. Using a credit card can also be done by entering the card’s number, expiration date, and security code into an online payment form.

      Once a transaction is processed the purchase amount is added to your account balance. This reduces your available credit and all purchases are tracked and reported to you, along with any accrued interest, via periodic billing statements.

      Each billing period spans 30 days with payment due no less than 21 days following the issuance of the billing statement.

      • Most credit cards offer a grace period on each bill. Essentially, this allows you to avoid any interest charges by paying the entire balance by the due date. 
      • If you pay less than the full balance, you lose the grace period privileges. This means you will be charged interest on the unpaid portion of the balance, and you will be charged interest right away on any new purchases.
      • You must pay at least the stipulated minimum amount by the due date. Failure to do so is likely to result in late fees, a higher APR, and a delinquency notice on your credit report.

      Line of Credit vs Credit Card: Key Differences

      Key FeaturesLine of CreditCredit Card
      Average APRTypically, lower than a credit card, especially when secured with collateralTypically, higher than a line of credit
      Credit LimitTypically, much higher than a credit card, especially when secured with collateralTypically, much lower than a line of credit
      Grace PeriodNo grace periodTypically, 21 days
      Draw PeriodTypically, a few years; longer periods exist, with some rare arrangements offering an infinite drawInfinite draw period, assuming you make the required minimum payments
      FeesPotentially, activation fees, annual maintenance fees, draw fees, late payment fees, and returned payment feesPotentially, annual maintenance fees, balance transfer fees, cash advance fees, late payment, and returned fees
      Credit Score RequirementsTypically calls for good to exceptional creditWide availability for high to low credit scores, with increasingly high APRs
      Rewards/PerksNo rewards/perksDiverse rewards, including cash back statement credits
      Common UsesSignificant outlays, such as capital expenditures, operating expenses associated with seasonal cyclicality, and emergency repairsRecurring expenses, such as inventory purchases, rent, utility bills, and travel expenses.

      When To Use a Credit Card and a Line of Credit

      In light of their differences, there are certain situations when using a line of credit is optimal and other situations where credit card utilization is more sensible.

      A Line Of Credit is most useful when you have the potential for unexpected, large outlays. It gives you the flexibility to address these issues without the need to precisely time and fund them via a cash reserve or a well-defined installment loan.

      A Credit Card is most useful when your potential spend is low to moderate. It’s a highly convenient way to facilitate purchases without drawing down on your cash reserve.

      You should only use a credit card for everyday spending if you intend to pay your bill off each month by the due date. Doing so you’ll avoid accumulating problematic debt, needing a debt consolidation loan, and paying interest of 15-30 percent.

      All credit cards are lines of credit, but not all lines of credit are credit cards.

      Alternatives to Revolving Line of Credit

      An even better idea than using these types of money purchasing systems is to provide the money yourself: 

      • Focus on saving: Establish a rigorous, but realistic budgetary framework – with a focus on generating savings each month. Gradually build up a money reserve you can tap for unexpected operational needs and capital expenditures.
      • Establish more lenient payment plans. Work with your key vendors to extend your payment terms. This can improve your near-term cash flows and give your more day-to-day flexibility.
      • Sell unnecessary fixed assets. Oftentimes, businesses acquire assets that become obsolete over time. Assess your stock of fixed assets to determine if you are holding onto any unnecessary equipment, furniture, or automobiles. Selling these assets could be an easy way to raise cash.
      • Leverage local support. Explore your community to find business associations, mutual assistance groups, and stimulus-oriented non-profit organizations that can provide free consulting services, monetary grants, and donations of real assets to facilitate your business endeavors.

      Take Away

      • A line of credit provides you access to more cash, but the availability of the line is limited.
      • With a credit card, your access to funds is lower and costlier, but you have the ability to utilize the credit indefinitely.
      • Both a credit card and a line of credit loan can be beneficial, which is why many businesses maintain both.
      • Ideally, a credit card should be used for high volume transactions with relatively moderate costs, such as service subscriptions, travel expenses, meals, and supplies.
      • Conversely, a line of credit should be used sparingly, perhaps, for unexpected capital expenditures or operating expenses associated with seasonal changes.