Cash woes? A personal loan to the rescue!

    When to Use a Credit Line Instead of a Credit Card

    What is a credit line?

    A credit line allows you to borrow a fixed amount of money from your credit card lender (for example up to 4 times your monthly income). Depending on your annual income, some banks in Singapore allow you to borrow up to 10 times your monthly income. However, the amount you borrow can also be called flexible as you can borrow any amount up to the credit limit assigned to you.

    A personal line of credit can be used on an ad-hoc basis, i.e. use it as and when you require it and without having to provide a reason for applying for the credit line unlike other lines of credit such as loans. You have the flexibility to repay the borrowed amount depending on your financial circumstances. Usually, the minimum payment requirement for a line of credit is 2.5% of the borrowed amount or S$50, depending on whichever of the 2 is higher.

    When you should use a credit line instead of a credit card

    • Paying for large purchases:
    • Credit cards have very high interest charges. Unless you are prepared to pay your outstanding balance in full in your next statement cycle, try avoiding the use of your credit card for large purchases and payments. For instance, paying for plumbing, carpentry charges, electrical wiring, etc. a line of credit is a better option than a credit card. Line of credit charges a lower interest rate when compared to a credit card interest rate and allows you the flexibility to pay as and when you have funds available.

      However, for purchases that offer rewards, cashback, miles, etc. it is better to use a credit card than a credit line. This is because, in more cases than not, if you use your credit line to make retail purchases or any purchases eligible for such rewards, you will forfeit them if you use a personal line of credit to make the payment.

    • When you know you cannot repay the borrowed amount by the next statement date:
    • Credit cards are best suited for short-term debt and a credit line is better suited for long-term debt. Interest rates on credit cards start to snowball when you do not make full payments on your outstanding balances. Take for example, you need to make repairs on your car, you do not know how much it would cost you initially, but you know you will not be able to repay the whole borrowed amount by the next statement cycle. If after all the repairs on your car have been done and it has cost you around S$10,000, you may not be able to pay back the whole amount next month.

      With a credit card, the interest on the balance that you did not pay by the next statement cycle will snowball with compound interest and by the time you are done repaying it, it would have cost you another few thousands. As a credit line has a more manageable interest rate, it is better suited to be used for debts that spillover for the next few months.

    • When you need quick access to cash:
    • Although a credit card and credit line can both provide quick access to cash as and when you need it, for easy access to cash, a credit line is a better option. This is because, more often than not, there are no withdrawal fees involved with withdrawing money from your credit line account. Credit cards on the other hand charge you a minimum of 6% of S$15 for every cash advance transaction. Credit lines also have lower interest rates on cash when compared to credit card cash advance.

      You can use a credit line for:

      • Withdrawing cash from an ATM.
      • Transferring money from your credit line to your current or savings account.
      • To write cheques with cheque books linked to your credit line account.
    • When you need a small bridging loan:
    • For any reason, if a part of the payment for selling your home has been delayed and you do not want to apply for a bridging loan for a comparatively small amount, you can use a credit line instead of a credit card or any other line of credit (such as a personal loan, personal instalment loan etc.). This is because there may be additional charges like prepayment penalties associated with such loans. A credit line will not only offer you lower interest rates, but you will have the flexibility of paying off the borrowed money as and when you receive the balance payment from selling your house without prepayment or pre-closure charges.

    Paying less with a credit line

    The key takeaway from applying for any banking product and service is that you should choose an option that helps you save. The main difference between credit cards and credit lines boils down to the interest rate. When compared to a credit card, a credit line charges lower interest rates.

    What you need to consider with a credit line

    Credit cards offer grace period on purchases made after which interest rates are accrued on a monthly basis. With a credit line, interest rates are charged daily on the amount that you borrow. Although credit lines charge lower rates of interest, your outstanding balance will increase daily if you don’t pay it off in full.

    Additionally, credit lines may also charge a minimum interest payment every month. This means that, if in a month you did not borrow any money from your credit line, you will still be subjected to the minimum interest payment. Therefore, it is advisable to apply for a credit line only if you are going to use it.

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