Open Credit Vs. Line of Credit

Open credit and a line of credit are obtained through applying for loans with financial institutions. They help establish credit and increase a credit score, if the accounts are kept in good standing. They differ in their qualifications and limitations.

Open Credit

Open credit refers to your current accounts that are in repayment. Open mortgage loans, credit cards, auto loans, personal loans, even your account with a utility company are types of open credit.

Qualifications For Obtaining Open Credit

Whether a lender gives you a loan depends on credit score, credit history, job stability, income, collateral and other factors. These factors also influence how much open credit or line of credit you'll receive. Credit often is determined by credit score---620 or higher is generally a good score. However, the credit score will be determined somewhat by credit history. Late payments, collections and charge offs can negatively affect a credit score. All of these factors can hurt you when you apply for open credit or lines of credit.

Line of Credit

A line of credit refers to a revolving account, like a credit card account, that allows you to take out or borrow any amount of money needed at any time up to a predetermined amount, or credit limit, that the lender sets on the account.

Qualifications for a Line of Credit

Lines of credit can be secured or unsecured, depending on the creditworthiness of the borrower. An unsecured line of credit does not require anything as collateral and is based on credit score and credit history. Secured lines of credit are based on the value of the collateral, such as a home. For example, some homeowners have a home equity line of credit, which allows them to borrow money based on the equity in their home.

Differences

Open credit is like an installment loan because it does not allow you to borrow more money as the account balance lowers. With a line of credit, however, as the balance lowers, more money can be borrowed on the account up to the credit limit of the account. A line of credit allows you to borrow more money without applying for a new loan.