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What is Open-End Credit?

  • by Joseph Priebe|
  • 0 Comment |
  • Updated: June 24, 2022 |
  • Credit

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Open-end credit, also called revolving credit, gives you a specific limit of credit and the ability to borrow as much or as little of that money. You repay any amount you used below your set limit within a specified period. You can pay the balance in full each month or make installment payments.

You have a certain amount of credit to use with a credit card. You are obligated to repay the amount of credit that you have used. You can keep the credit line open forever, hence the term open-end credit.

Understanding Open-End Credit

Open-end credit agreements are excellent financing options for you because they allow you more control over how much and when you can borrow. In addition, you're not charged interest on the amount of the line of credit that you do not use, which can lead to interest savings for you compared to an installment loan.

How Does Open-End Credit Work?

Once approved, you'll have access to your entire credit limit or total amount. For instance, a lender approves a $2,500 line of credit, and you withdraw $2,000. Your payments to be made will be $2,000 plus interest, without having to repay the $500 remaining in the account unless the same is utilized for something else. Once you pay off the $2,000 owed, your line of credit stays open for you to borrow more later, making the line of credit revolving. This allows you to access as much or as little money as you choose, depending on your current needs.

Examples of Open-End Credit

Also called bank cards, financial institutions issue them. Credit cards are the more common form in the consumer market and provide immediate access to funds. You borrow any amount up to your approved credit limit and pay back the balance over time.

The lender charges interest on the amount you owe and could incur charges if you make a late payment or go over your credit limit. The amount you repay becomes available for you to use again. American Express. MasterCard, and VISA, are widely recognized credit cards.

Home Equity Lines of Credit (HELOCs)

A home equity line of credit is another common form and uses a percentage of your home equity to provide a revolving line of credit. You can draw from your line of credit and repay some of it monthly or pay it in full, somewhat like a credit card.

Charge Cards

Oil companies, department stores, and telephone companies issue the second-largest credit card category. You can only make purchases from the company that issued the card. You make payments every month and pay your balance at your own pace, with interest.

Travel and Entertainment (T&E) Cards

This credit card type was initially used to pay for airline, hotel, and other business expenses. Now, all other businesses, such as department stores, drugstores, gas stations, accept them. The significant difference between travel and entertainment cards, and bank cards, is that travel entertainment cards require that you pay in full each month, but they do not charge interest. American Express, Diners Club, and Carte Blanche are T&E cards. Diners Club was the first travel card when it was issued in 1950.

Bank Overdraft Protection for Checking Accounts

Overdraft protection and overdraft services are a line of credit that can cover your transactions when you spend more than the amount in your checking account. It protects you from missing payments, bouncing checks, and having your debit card declined.

Secured and Unsecured Open-End Credit

Open-end loans are categorized as either secured or unsecured:

Open-End Unsecured

A loan or line of credit is unsecured when it does not require an item of value as security. For example, most credit cards are issued to you without collateral attached to them. However, you'll need to have a moderate to good credit score to be approved for an unsecured line of credit. A good score shows the lenders that you are a minimal risk to themto a them and can managecanmanage a higher credit limit.

Open-End Secured

To be approved for a secured open line of credit, you'll need collateral. Some examples are home equity lines of credit (HELOCs) and secured credit cards. The amount of money or credit you receive will depend on the amount you have deposited with the issuing bank if it's a secured credit card.

Whereas the value of your property attached is considered in regards to HELOCs. Failure to repay your loan within the agreed term could forfeit the property used as security.

Advantages of Open-End Credit Products

  • Some of the benefits of open-end loans or credit lines include:
  • Your terms of borrowing and making payments are flexible.
  • A credit card allows you to make multiple purchases without worrying about cash. Also, you may benefit from loyalty programs available on purchases with your credit card.
  • You can cover unexpected emergencies.
  • HELOCs commonly have lower interest rates.
  • A secured credit card allows you the opportunity to improve your credit score and qualify for an unsecured credit card in the future.

Disadvantages of Open-End Credit Products

  • Open-end lines of credit and loans do have their drawbacks:
  • Unsecured open-end credit lines generally have higher interest rates and credit requirements than those secured by collateral.
  • Annual Percentage Rates (APRs) for open lines of credit are always varied widely from one lender to another.
  • If you misuse your credit account, you'll hurt your credit score. It's estimated that the average household in the U.S. will carry about $8,701 of credit card debt in 2020.
  • The terms of your loan could change at any time. If your credit rating goes up, your credit limit could be increased. On the other hand, your limit can also decrease if your lender considers you a higher risk than when you first applied.
  • Late payments and fees for going over your credit limit can be expensive.
  • You could be tempted to overspend, leading to difficulty keeping up with your payments.

American Consumer Debt (Billions)

Year Credit Card Debt Total Debt Credit Card Debt to Total Debt %
2010 $731 $11,844 6.20%
2011 $693 $11,661 5.90%
2012 $674 $11,310 6.00%
2013 $672 $11,280 6.00%
2014 $680 $11,710 5.80%
2014 $680 $11,710 5.80%
2015 $714 $12,065 5.90%
2016 $747 $12,350 6.00%
2017 $808 $12,955 6.20%
2018 $844 $13,512 6.20%
2019 $881 $13,952 6.30%
2020 $807 $14,353 5.60%

Source: Federal Reserve Bank of New York

 

Open-End Credit Laws

Truth in Lending (Regulation Z) protects you when using consumer credit. The Consumer Financial Protection Bureau (CFPB) enforces the regulations to guarantee that your creditors adhere to the rules. Regulation Z provides guidelines on actions required during, after, and before creating an account. Congress last made changes to Regulation Z in March of 2021. The rules focus on specific guidance on disclosures, billing cycles, and civil liabilities to resolve those issues in case of an error resulting in any damages.

When creating an open-end credit plan, your creditor must disclose to you each of these items in terms of your open-end credit:

  • A section explaining how your creditor calcuates your APR and any other charges to your account.
  • The conditions and method of computing the balance upon which a finance charge may be imposed, including any set minimum or a fixed amount.
  • Whether you are provided a grace period or not.
  • A statement gives you notice of how the lender will secure your loan regarding collateral.
  • A statement should be provided explaining the obligations of both the creditor and you.

If your credit has been extended, the lender is required to send you statements within each billing cycle that will include:

  • The date your payment must be made to avoid additional charges or penalties.
  • Any outstanding balance at the beginning of a statement period.
  • Your account's due balance at the end of the statement period.
  • What you owe and a statement of how the creditor determined it.
  • A brief description of the date, amount, and credit extensions during a specified period.
  • The total payments that were credited to you during a statement period.
  • The full finance charge billed as interest.
  • The address, phone number, or website where your billing inquiries are to be sent.

Your creditor's penalty for violating any of the above disclosure requirements include:

  • Attorneys' fees and costs incurred by you when seeking legal remedy.
  • The actual cost of damage suffered by you as a result.
  • Twice the amount of any finance charges between $100 and $1,000.

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