Line of credit offers a balance between cost and convenience; it’s best suited to those with variable cash flow needs. See how two leading credit lines stack up against each other.
Credit cards offer convenience and flexibility, but charge you with high interest rates. Personal loans have significantly lower interest rates, but are less flexible.
If your needs aren’t quite met by either of these, consider the third option. A line of credit sits somewhere between credit cards and personal loans on the cost-versus-convenience spectrum.
Let’s examine how credit lines work, and compare two offers from HSBC and Citibank.
How does a line of credit work?
A line of credit, also known as a credit line, is a revolving credit facility that’s helpful for those with various cash flow needs. It essentially provides any amount of funds you can borrow from when needed. It also allows you to repay your debt at your discretion.
Of course, interest charges are incurred on the amount used. You also have to pay a service fee to keep your credit line account active even if you don’t borrow from it.
Below are the defining features of credit lines.
Lower interest than credit cards
The interest charged on your outstanding balance is comparatively lower than a credit card’s. Credit lines charge an interest of 19% to 20% per annum as compared to the 28% to 29% per annum typically charged by credit cards. This makes lines of credit cheaper to borrow from.
Having said that, it’s important to note that credit cards aren’t really made to be borrowed from. Instead, credit cards offer convenience and allow you to reap rewards from your purchases. If you are seeking to borrow funds, a better comparison would be between credit lines and personal loans.
More flexible than personal loans
When you borrow from a credit line, you do not have to make fixed monthly repayments. Instead, you are free to pay off your balance at your own discretion. However, there is still a minimum payment you have to meet each month, but this is relatively small – around 3% of the outstanding balance.
Because your repayment amount can vary from month to month, credit lines offer a greater degree of flexibility than personal loans, which require fixed monthly payments. This makes credit lines useful for those with inconsistent income or seasonal cash flow needs.
Does not require collateral
A credit line is an unsecured credit facility, which means you do not have to pledge any assets as collateral. You can apply for a credit line as long as you fulfil the eligibility criteria. A guarantor is not required.
How much can you borrow with a line of credit?
A line of credit is not unlimited. Your account comes with a credit limit, and once this limit is reached, you won’t be able to borrow funds anymore.
Typically, you will be granted a credit limit of up to four times your monthly income, but this may be higher or lower depending on your profile. You may also indicate your preferred credit limit, but it would ultimately be up to the bank’s discretion.
Citibank Ready Credit vs HSBC Personal Line of Credit
|Citibank Ready Credit||HSBC Personal Line of Credit|
|Credit limit: 4x your monthly income, 8x if your annual income is over S$120,000|
Interest rate: 20.95% per annum with a minimum charge of S$5 per month
Minimum monthly repayment: S$50 or 1% of outstanding balance (whichever is higher)
Annual fee: S$100 (first year waived)
|Credit limit: 4x your monthly income, 6x if your annual income is over S$120,000|
Interest rate: 18.5% per annum (12% per annum for HSBC Premier customers) with a minimum charge of S$10 per month
Minimum monthly repayment: S$15 or 3% of outstanding balance (whichever is higher)
Annual fee: S$60 (first year waived)
What these products have in common
Both Citibank Ready Credit and HSBC Personal Line of Credit are similar – they both offer unsecured credit you can use on a revolving basis. They essentially work the same way.
As such, you can choose either of these products to meet unexpected or urgent expenses, or to help manage the uncertainties of earning a variable income.
How these products differ
#1: Credit limit
Citibank Ready Credit offers a higher credit limit than HSBC Personal Line of Credit. With Cititbank, you can get up to eight times your monthly income, while the cap for HSBC is six times your monthly income.
However, these limits only apply for those with incomes of at least S$120,000 per year. For applicants with lower incomes, both banks offer a credit limit of up to four times your monthly income.
#2: Interest rate
HSBC offers a lower interest rate compared to Citibank.
With the former, you will be charged an interest of 18.5% per annum, or as low as 12% per annum if you happen to be a HSBC Premier customer at the time of application. On the other hand, Citibank offers an interest rate of 20.95% per annum.
With credit lines, interest charged depends on the amount you borrow. This is calculated daily, and it is subject to a minimum interest each month. Once you use your credit line, you start accruing interest charges until the amount borrowed is repaid.
Citibank’s minimum interest charge is S$5 per month while HSBC’s minimum interest charge is S$10 per month. This difference may not matter much, especially if you borrow large amounts.
#3: Minimum monthly repayment
The minimum monthly payment for HSBC Personal Line of Credit is S$15, or 3% of the outstanding balance (whichever is higher). Meanwhile the minimum amount for Citibank Ready Credit is S$50, or 1% of your outstanding balance (whichever is higher).
In absolute terms, these differences are negligible at small amounts, but could be significant with bigger loans. Thus, it’s important to pay attention to these rates with every amount you borrow.
#4: Annual fee
The annual fee charge is another difference between the two lines of credit. HSBC’s annual fee of S$60 is lower than Citibank’s, which is pegged at S$100. Both banks offer a waiver on the annual fee for the first year of your credit line account.
Conclusion: Which credit line should you choose?
HSBC Personal Line of Credit offers a lower interest rate, which is advantageous as it means a lower cost of borrowing in the long run. This advantage is further amplified if you are a HSBC Premier customer since you will be eligible for an exclusive rate of just 12% per annum.
However, Citibank Ready Credit offers a higher potential borrowing limit of up to eight times your monthly salary, provided you earn at least S$120,000 per year.
All things considered, a lower interest rate is always preferable, which would make HSBC the default choice for the average applicant. However, if you’re a high income-earner, and prefer a higher credit limit, then Citibank would be a better match for your needs.
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By Alevin Chan
An ex-Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.