Lines Of Credit vs Credit Cards
About This Lesson
In this lesson, we’re going to cover the following:
- Difference between line of credit vs. credit card
- Choosing between a credit card or line of credit
- When to use a credit card
- Should a credit card be used to pay off a line of credit
- Does a credit card affect your credit score
- When to use a line of credit
- Should a line of credit be used to pay off a credit card
- Does a line of credit affect your credit score
Full Video Transcript
Hello, and welcome to this module lines of credit versus credit cards. So lines of credit can be a really, really great source of working capital. Once you have access to it, it’s almost like a pool of cash that you can use in leverage whenever. So I’m going to break down the difference between this and credit cards and really how to take advantage of it. So here’s what we’re going to cover. The difference between lines and lines of credit, choosing a credit card line really when to use a credit card, if you have one, and if you, you should use a credit card to pay off a line of credit, or does a credit card affect your credit score, which typically it does when to use a line of credit and then should a line of credit be used to pay off a credit card, which I’m going to go in and say, yes, I’ve done that multiple times and does a line of credit affect your credit score.
So the primary difference between the line of credit is that it lets you borrow money against the revolving line of credit, up to a certain lump sum that you get with the loan while credit cards, you can make purchases, then have to pay it back. So essentially with a line of credit, it’s almost like a combination of a loan and a just like a loan, but like a line as well, because you can, you don’t necessarily have to pay off the line of credit, but you can pay it down over time, but it makes sense to use it pay it off, use it pay it off, if you want to get more lines of credit. So both credit cards and lines can either be secured or unsecured depending upon your credit scores and qualifications and credit cards may offer more rewards, programs and lines of credit do not.
So that’s the biggest thing. So with the line of credit, you can transfer a money from your line of credit, to your actual business checking account and use it as cash versus what a credit card you can’t do that. So that’s really the difference. It’s almost like a pool of cash literally. And then credit cards usually have higher interest rates as well as fees for cash advantages and a line of credits don’t. They have a fixed interest rate once you agree to the line of credit. It’s just what it is, right? So a really cool rule of thumb to do is if you’re already using your credit card, and this is what I do. So if you’re already using your credit card, you know, use your credit card up to like 50, $60,000. And then let’s just say you have a 50k – 60,000 line of credit.
So you take the money from the line of credit, pay off the credit card in full with the line of credit. And then you just kind of just keep doing a cycle where you take the $50,000 instead of this paying off your credit card, you use the $50,000, basically, you’ve got $50,000 cash and you take the money from their line of credit and you pay their credit card off from the line of credit. The credit card is not paid in full, and then you take the $50,000 cash and then you pay off the line of credit and you just, it’s kind of like a circle. You just keep revolving it over and over again, because what it’s doing is number one, it’s giving you rewards points for the credit card. Number two, it’s helping you use the revolving line of credit so that we can get a higher line of credit.
Then number three, you’re just using the same $50,000, just in two ways, right? You’re taking $50,000 cash using it on your credit card and then paying their credit card off with the line and then paying the line off with the cash. So it becomes like a circle. So you’re basically revolving at that point. So when you’re considering a credit card or line of credit again, many of you are already going to have credit cards and credit lines. So when it comes to like an actual line of credit you want to look for essentially a few things. So deciding what financial instruments can be better, it’s going to be based off your needs. So I would recommend you do what I just explained about using the circle. And if you’re looking for a high limit and you want to be able to use this for expanding your business like cash, you want to really look into a line of credit.
And you also want to know, cause the credit cards, depending upon the financial institution you’re with, may or may not affect your eligibility to get that line of credit. So, you know, credit cards are used for expenses that you don’t need to pay in cash. So essentially a line of credit can be used as cash. So you can use that line of credit as cash with no cause, it’s going to literally transfer to your checking account. Versus credit cards, you can use this for traditional expenses that you don’t necessarily have to use as cash, but you can put it on your credit card and pay it off with your cash. So with their credit cards, you’re going to get those rewards points as an extra perk, which is why I recommend still using the credit cards, but you can’t use it for working capital.
It’s just almost like expenses that you were going to have to pay anyways. So why not use it so you can either get traveled expenses, pay for cash back or any other type of thing. So should a credit card be used to pay off a line of credit? Well, I just explained to you how you would do it if you did that. So in my opinion, instead of using the credit card to pay off the line of credit, you already have the $50,000 cash. So instead of paying that $50,000 cash to pay off a $50,000 credit card, you essentially take the money from the line of credit, pay the credit card off, and then you use the cash to pay off the credit card. Right? So that’s really important. So one way you could do it is if you do have a credit card and let’s just say you have an introductory credit card with a 0% interest for like 12 months, Chase really does these.
Essentially what you could do is you can get the $50,000 off that credit card. I wouldn’t recommend swiping through your merchant account. I would recommend going to somebody’s account that you swipe through. And then you swipe through theirs, as you get the cash off of that particular credit card, you have to pay the merchant fees and then you pay off the line of credit. And then over time you just paid a credit card back because you have 0% interest. So it’s like almost financial leverage. So that’s the only way I would recommend doing that. Otherwise I would just do it the other way around. So obviously a credit score does affect your credit. So just like SBA loans, any type of loan typically if you’re getting a credit card and we’ve already kind of gone through this in great detail, if it’s in the business’ name and you just personally guaranteed the credit card, then it’s not going to show up on your personal credit.
And then typically business cash credit cards don’t necessarily report utilization in some scenarios, it does. So, but it’s not going to affect your personal credit, right. Now, if you miss a payment, which you aren’t going to miss any payments, because never use a credit, what you don’t have in cash or cash flow, even if you’re making those minimum monthly payments, that’s going to affect your ability to get that. So when to use a line of credit is essentially like, again, they’re going to be for larger expenses or using it for working capital, or you can use it as cash. So if you need to get office space, if you need to pay payroll, if you need to hire employees, a line of credit is great for keeping your cash flow steady because you can already, you can just access it as cash. So let’s just say you’re approved for a $1 million line of credit.
You can take out $50,000 now, $10,000 later, $500,000 down the road. And you’re not obligated to take out all of the funds whenever you need to that you’re approved for. So a million dollars line of credit is literally like having a million dollars in cash. Seriously. You just have to pay it. You have to pay it back, but that’s how it can be used. It’s literally like working, it’s almost like again, a term loan without having to agree to the terms upfront. It’s like a check that you can use whenever you want with specific terms. So should a line of credit be used to pay off a credit card? Absolutely. I’ve already explained how to do that process when you’re paying off your credit card, you essentially want to revolve it, right? You already are going to pay the $50,000 so if I’m already paying $50,000 in expenses, I’m already going to do that because I already have the cash to pay it off. So what I would do is take 50,000 from my line of credit and then put that in my checking account and then pay the credit card and then take the $50,000 that I was already going to spend and pay off the line and just keep doing it over and over and over again. So just like credit cards, invoice financing, or any cashflow loans that can impact your credit score so is the line of credit. So you want to make sure you keep a positive credit history and keep good utilization with this line of credit because you are responsible for the line of credit, but essentially the game is revolving it, right? If you already have 50,000 in expenses, put it on that credit card, that’s going to give you cash back.
You already have the $50,000 allocated in cash. Take $50,000 from the line of credit, pay off the credit card and then take the 50,000 use on using cash and pay off the line and just keep doing it over and over and over again because you’re getting cash back. And then you’re showing good faith that you’re able to pay off that line of credit. So if you want to increase it in the future, you can show that you can increase it and you can be trusted with that amount of money. All right. Hope. This makes sense. It’s really, really powerful and I’ll cover the next module on different ways to take advantage of this.