Is a Credit Line the Same as a Credit Limit? Key Differences Explained

Many people use the terms “credit line” and “credit limit” interchangeably However, they actually refer to related but distinct concepts when it comes to borrowing money. This article will explain what each term means and the key differences between a credit line vs a credit limit

What is a Credit Line?

A credit line, also known as a line of credit, is a pre-approved loan you can access as needed up to a set borrowing limit With a credit line, you only pay interest on the amount you actually withdraw, not the full borrowing limit

Some key features of a credit line:

• Flexible – You can access funds as needed up to your credit limit
• Reusable – As you repay money borrowed, it becomes available to withdraw again
• Interest-only payments – You only pay interest on the amount borrowed, not the full credit limit

Common types of credit lines include personal lines of credit from banks, business lines of credit, and home equity lines of credit (HELOCs). Credit lines provide revolving access to credit, similar to credit cards.

What is a Credit Limit?

A credit limit sets the maximum amount you can borrow on a specific credit account or product. For credit cards, your credit limit is the most you can charge to the card. For lines of credit, the credit limit is the maximum you can withdraw.

When you use a credit card or other revolving credit, your purchases get subtracted from your total credit limit. The remaining amount is your available credit.

Key features of a credit limit:

• Sets a ceiling on how much you can borrow on a specific account
• Prevents overspending beyond what the lender approves
• Available credit declines as you use the account, up to the credit limit

Credit limits help ensure borrowers don’t take on debt they can’t repay. Lenders set limits based on your creditworthiness.

5 Key Differences Between a Credit Line and Credit Limit

While a credit line and credit limit sound similar, they have distinct definitions:

1. Account Type

• A credit line is a type of loan account you can draw funds from.

• A credit limit is a boundary set on a loan or credit account.

2. Access to Funds

• With a credit line, you can withdraw money as needed up to the credit limit.

• A credit limit only lets you make charges up to a certain amount on a credit account.

3. Interest Charges

• With a credit line, you only pay interest on money you actually borrow.

• With a credit limit, you pay interest on any unpaid balance carried over month-to-month.

4. Payments

• Credit lines often have minimum monthly payments of interest plus a percentage of the principal.

• Credit card limits require monthly payments of at least the minimum due.

5. Uses

• Credit lines allow repeated access to a set pool of funds for bigger expenses.

• Credit limits enable everyday spending on purchases and monthly bills.

Real World Examples

To understand the practical difference between a credit line and credit limit, let’s look at some real world examples.

Jen takes out a $20,000 personal line of credit from her bank.

• Jen can withdraw up to $20,000 as needed from this line of credit.
• She will only pay interest on amounts she borrows, at the agreed interest rate.
• Jen can repay money she withdraws and borrow again up to her $20,000 credit line limit.

Mike has a credit card with a $5,000 credit limit.

• Mike can charge up to $5,000 total on this credit card account.
• Each purchase made reduces his available credit until it reaches $0.
• He must pay at least the minimum monthly payment on any balance carried over.

While both have defined borrowing maximums, Jen utilizes her line of credit for accessing money while Mike uses his card’s credit limit for transactions and monthly spending.

Is a Credit Line the Same as a Credit Limit?

While related, a credit line and a credit limit are distinct – one is a loan account you can draw funds from as needed, while the other controls spending for a credit account.

The bottom line:

• A credit line lets you access and reuse funds up to a set borrowing limit. You pay interest on amounts withdrawn.

• A credit limit sets the maximum you can charge on a credit card or other revolving account. You pay interest on carried balances.

So is a credit line the same as a credit limit? No, they refer to different types of credit accounts and functions, despite both setting borrowing maximums. Understanding the differences helps you choose suitable credit products for funding large expenses or everyday spending.

Yes, a personal line of credit can generally be used for a wide variety of expenses. Unlike loans tied to a specific purchase, like a car or house, a line of credit provides flexible access to funds that can be used for nearly anything.

A $500 credit line means a lender has authorized you to borrow up to $500. This is the maximum amount you can spend on a credit card or through a line of credit.