What is open-end credit?
Open-end credit is a line of credit that may be used up to a specific preset limit. It is sometimes referred to as revolving credit. There are several types of open-end credit.
To better understand open-end credit, it helps to know what closed-end credit means. With a closed-end loan, you borrow a specific amount of money for a set period of time. For example, you may borrow $20,000 for 60 months to buy a car. The total amount due plus interest is amortized over 60 months to determine your monthly payments. Once you have made all your payments, the car loan is paid in full.
Open-end credit works differently. You qualify for a particular amount of money and can borrow as little or as much of that money as you like. In fact, once you have paid your balance back (in part or in full) you can re-borrow the money, without having to renegotiate the terms of your loan.
For example, if you have a credit limit of $20,000 at 5 percent interest, you can borrow and re-borrow money up to that $20,000 loan limit and never worry about the interest rate going up. Two potential pitfalls of open-end credit are:
- You may be charged a monthly or annual fee for keeping the account open.
- You may be tempted to spend the money on things you do not absolutely need.
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Open-end credit examples
The following are all types of open-end credit:
- Home equity lines of credit, or HELOCs.
- Department store credit cards.
- Service station credit cards.
- Bank-issued credit cards.
- Overdraft protection for checking accounts.
TransUnion suggests that you read the fine print before signing an open-end credit agreement. Be sure to ask the following questions:
- What is the interest rate?
- Is there an annual or monthly fee?
- Will the interest rate be higher if I take a cash advance on this account?
- Can I pay off the balance without a penalty?
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