What Is Open-End Credit?

by Scott Damon ; Updated July 27, 2017
Open-end credit has both advantages and disadvantages for a debtor.

Many consumers use credit to purchase necessities in their life. From the quick trip to the drug store to securing a mortgage for a home, credit can provide assistance when you do not have the capital to pay for things outright. Credit cards are examples of open-end credit. Open-end credit is also sometimes referred to as revolving credit.

Definition

Open-end credit is a type of credit in which the lender extends credit to a borrower up to a certain credit limit. The borrower can make frequent and repeated transactions up to that credit limit. At the end of the term defined by the lender, the lender will send an invoice or bill to the borrower.

Interest Rate

For the privilege of having open-end credit, the lending institution will charge interest on the purchases if they are not paid back by a certain date. This is true of credit cards where the borrower will not owe any interest unless he does not pay the full balance due by the due date. Credit cards have monthly due dates.

Advantages

Some advantages are associated with open-end credit. Many of these advantages apply to credit cards. Usually, the borrower can make as many purchase as he'd like (provided he stays below the credit limit), the borrower does not have to carry cash in order to make those purchase, extra warranties for items purchased may be extended by the lender, and the borrower may earn rewards for the purchases she makes with her open-end credit line.

Disadvantages

Some disadvantages also are associated with open-end credit. The credit lines may charge an annual fee. These credit lines usually have a high interest rate. So while purchases will carry no interest if they are paid back within the billing cycle, those may come with an APR (annual percentage rate) of 15 percent. Also, if you miss a payment on an open-end credit line, many lenders have the right to raise your interest rates and charge late fees.

Home Equity

Another common form of open-end credit is a home equity line. If a person has equity in his home, he may apply for a home equity line of credit in which the borrower can use the equity in his home to make purchases or pay down debt. The borrower then pays the bank principal and interest payments to pay down that balance. Many people use this type of open-end credit to pay down higher-interest credit cards.

About the Author

Scott Damon is a Web content specialist who has written for a multitude of websites dating back to 2007. Damon covers a variety of topics including personal finance, small business, sports, food and travel, among many others.

Photo Credits

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