• Personal Line of Credit vs. Credit Card – Choosing the right option

    There are times when you need immediate access to credit, whether for a medical emergency or for a business-related transaction. It’s for such situations that you have financial tools like credit cards and line of credit. Both the tools are designed to allow you to borrow any amount, up to a limit, at any time and pay back as and when it’s convenient for you.

    But, then the question arises is - which option is the best for you? Even as both the facilities look similar, there are some differences that you must know before you make a choice. Read on to understand all you should know about line of credit and credit cards, and also check out how to choose the right option.

    Personal Line of Credit

    A personal line of credit (PLC) is an unsecured credit facility that gives you access to immediate cash. You pay interest only on the amount you withdraw and not the full amount.

    Features of PLC

    • Banks set a limit for every PLC. You can borrow within this fixed limit.
    • A PLC is a flexible loan that lets you withdraw cash as and when you need them.
    • If your PLC account is active, you can make as many withdrawals as you want.
    • These loans are unsecured loans, which means you will not have to pledge any collateral with the bank.

    Advantages and Disadvantages of PLC

    Advantages

    • You can use the cash for any purpose of your choice.
    • You have to pay interest only on the amount used.
    • The Annual Percentage Rates (APRs) are generally lower compared to credit cards.
    • You can borrow cash whenever you want to and reuse the account as many times as you wish.
    • Provides quick cash for emergency situations like medical treatments.

    Disadvantages

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    • If you fail to repay your monthly instalments on time, you may incur high rates of interest and penalties for late payments.
    • You might get tempted to spend more since cash is readily available.
    • The amount of interest you pay is not tax deductible.
    • Banks can change their APRs at any point, which will result in higher interest payments.
    • There is a mandatory monthly or annual fee for this facility, even if you do not withdraw the cash.

    Credit Cards

    Credit cards are also like a personal line of credit. You can borrow any amount you wish, up to your available limit. However, unlike a line of credit, credit cards offer rewards on your transactions.

    Features of Credit Cards

    • Credit cards come with a grace period, which is also known as interest-free period. During this period, you will not be charged any interest on your card transactions. In Singapore, it’s usually 21 days.
    • There is a credit limit beyond which you can’t spend.
    • Most cards come with an annual fee that you have to pay, regardless of the usage of the card.

    Advantages and Disadvantages of Credit Cards

    Advantages

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    • Credit cards are accepted at almost all merchant outlets across the globe.
    • It is extremely convenient to carry a credit card for making payments rather than carrying lump sum cash.
    • You can earn rewards as you spend with your card.
    • In the event of an emergency, you can also make cash withdrawal through any ATM.

    Disadvantages

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    • The interest rates are usually higher than most other credit facilities.
    • You tend to spend on things you don’t really need, resulting in unwanted debt burden.
    • If you do not pay the minimum amount towards your outstanding repayment on a monthly basis, you will incur hefty late payment charges.
    • If you default on payments, your credit score will be hampered. You may not get a loan if you have bad credit score.
    • If you take a cash advance, you will incur high interest rate of around 28% p.a.

    Which One is Right for You?

    When you withdraw cash at an ATM using your credit card, you will be charged a cash advance fee of S$15 or 6% of the amount withdrawn. PLC do not charge any withdrawal fee when you take out the cash. A PLC can be a cost-effective option due to the low interest rates and low annual income requirement, which starts from S$20,000. On the other hand, having a credit card is very convenient as you do not have to carry large amount of money. Although the interest rates are high, credit cards come with numerous perks and benefits. Unlike a PLC, you will earn rewards and also enjoy various other exclusive benefits and offers.

    Hence, before deciding on whether to take a PLC or a credit card, compare them across banks, make sure you read the fine prints, know your requirements, and how convenient they are for you.

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