The modern concept of credit was conceived in the 1700s when a bank allowed a man to withdraw more money from his bank account than he had in available funds. This was the first use of what we now know as an overdraft. Other forms of credit soon followed and in the twenty-first century, the majority of the UK adult population either uses credit on a daily basis or has some form of debt to be repaid, be it car finance, a student loan or even a mortgage.
There are now several forms of credit available in the UK finance market. From payday loans to home equity, from overdrafts to credit cards: there is almost definitely a type of credit product to suit any circumstance. Yet despite the range of borrowing options already established, the financial sector strives to innovate new forms of credit, either to answer an unmet demand or to make use of better technologies. One of the newer types of credit to join the market is a credit line. Like a credit card, a credit line allows you to manage your cashflow from month to month, meet unexpected bills and pay for occasional unbudgeted purchases like birthday presents or weekends away.
A credit line is an ongoing line of credit which remains accessible throughout your credit agreement. Instead of a loan where you must submit an application each time you wish to borrow, a credit line only requires one application. If approved, you can withdraw funds, up to your credit limit, and the money will be transferred directly into your bank account, usually within minutes.
You repay the funds that you borrowed at the end of the month, or you can make a minimum payment if you don’t want to settle the balance in full, and you only pay for the credit that you use. This means, you will only accrue interest on the amount of money you have withdrawn.
A credit card is a more widely used form of revolving credit at the moment because credit lines are still new. They function much in the same way as credit lines, but instead of withdrawing funds into your bank account, you will be supplied with a plastic credit card which you use to make transactions. Similarly, you will only pay interest on the amount that you borrow and if you aren’t able to settle your balance in full each month, you have the option of making a minimum payment instead.
It remains difficult to compare different credit products, other than by interest rate, because each product is designed to meet a different market, a different demographic and usually a different borrowing need. For example, a personal loan from a bank may be used to buy a car or complete a kitchen renovation; a mortgage is used to buy a house and overdrafts, credit cards and credit lines tend to be used for more day to day purchases and cashflow management.
In order to decide whether you should apply for a credit card or a credit line, there are a few questions you can ask yourself:
It is always advisable to compare interest rates when choosing to apply for credit because you should aim to take out the credit with the lowest interest rate. However, interest rates are only given as a percentage figure which means the actual amount you repay depends on how much you borrow. For example, if you borrow £1000 at 10% APR, this means you will owe approximately £1100 at the end of a 12 month period, assuming you’ve made no interim payments. If you borrow £100 at 10% APR, you will owe around £110 at the end of the 12 month period. Although the interest rate is the same, you will repay less interest overall if you borrow £100 because the amount the interest is applied to is so much less. It’s good to check the representative example on a firm’s website in order gain an awareness of how much your borrowing may cost in terms of actual money.
The purpose of the credit product is vital when considering whether to choose between a credit card or a credit line. This is because the main difference between them is how the transactions are made. With a credit card, you use a card to make payments, and with a credit line, you’ll use your normal debit card to make payments. As a credit line means the money is transferred to your bank account, you can also make standing orders, bank transfers and direct debits with credit line credit, options that aren’t available with a credit card. So, if you generally need financial support to meet direct debits from time to time, then a credit line might be a more suitable form of credit. However, if you intend to make large purchases like a holiday, then a credit card can offer more consumer protections and help you get your money back if something goes wrong.
The terms and conditions form an important role in establishing a suitable credit product. Among other things, the interest rate applied to your credit card or credit line could be subject to change. Often, a credit card company will offer a low interest rate to entice new customers, which expires after a set period of time. For example, they may offer a 0% interest rate credit card for six months, after which the interest rate could rise to 35% APR. If you’re not careful, you could suddenly find yourself with a hefty balance to repay.
Unlike having a credit card where your interest rate may increase, having a credit line with Polar Credit means your interest rate will actually go down the longer you borrow with us. Polar Credit aims to provide a credit line which promotes sustainable credit usage so you can manage your finances and be rewarded for your responsible borrowing. After your one year anniversary with us, we will reduce your interest rate by 10% pa. Every six months thereafter, we will reduce your interest rate by 5% pa until you reach our minimum 29.9% pa.
Some credit card companies may offer rewards for customer loyalty so researching both options prior to applying is advisable. While we provide a credit line service, we would never encourage someone to apply for a Polar Credit line if it weren’t a suitable credit product in their circumstances.
If you would like to learn more about a credit line with Polar Credit and our sustainable credit commitments, please check some of the articles below, or see our Info Hub for more informational articles on financial products.