How is a line of credit similar to a credit card?

• A. Both allow borrowers to access funds up to a predetermined limit and repay over time.
• B. Both charge interest only if the entire credit limit is used.
• C. Both are only used for purchasing physical goods.
• D. Both require full repayment of the balance at the end of each month.

Answer: (A)

Verified step by step guidance

1. Understand the concept of a line of credit: A line of credit is a flexible loan from a financial institution that allows borrowers to access funds up to a predetermined limit. Interest is charged only on the amount borrowed, not the entire credit limit.
2. Understand the concept of a credit card: A credit card is a financial tool that allows users to make purchases or access funds up to a predetermined credit limit. Interest is charged on the outstanding balance if not paid in full by the due date.
3. Compare the similarities: Both a line of credit and a credit card allow borrowers to access funds up to a predetermined limit and repay over time. Interest is charged only on the amount borrowed or used, not the entire limit.
4. Evaluate the incorrect options: Both are not exclusively used for purchasing physical goods; they can also be used for services or cash advances. Additionally, neither requires full repayment of the balance at the end of each month unless specified by the terms.
5. Conclude the correct answer: The correct similarity is that both allow borrowers to access funds up to a predetermined limit and repay over time, with interest charged only on the amount used.