Many consumers use credit to purchase necessities. 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. Open-end credit, sometimes called revolving credit, is a type of credit whereby you're given a spending limit and you can spend up to that amount, but don't take all the money at once. Credit cards are examples of open-end credit.
What is Open-End Credit?
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. Closed-end credit, on the other hand, is a loan for a set amount, and you get all the money up front. For example, if you have a credit card with a $15,000 limit, you have an open-end loan, because you can use up to $15,000, but you only actually borrow what you use. When you use the card to buy groceries and spend $100, you only owe $100. If you receive a personal loan for $15,000, this is a closed-end credit example. You actually receive $15,000 to do what you will, and you pay that full amount back over time. You can't borrow more and you don't borrow less.
Interest Rates on Open-End Credit
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 monthly due date. Interest is assessed on the remaining balance and carried over to the following month.
Advantages of Open-End Credit Accounts
Open-end loans have many advantages, including access to money when you need it most and the flexibility to spend the money on whatever you need to spend it on. If you have a credit card, you can make as many purchase as you'd like, provided you stay below the credit limit. You then have the ability to make purchases without carrying cash, and if you have a credit card that earns rewards points or airline miles, you may benefit from those programs when you make large purchases.
Disadvantages of Open-End Loans
Open-end loans and lines of credit do have their drawbacks. Your credit card company may charge an annual fee, and you may have to pay a higher interest rate on an open-end loan than you would on a closed-end loan. If you default on your payments, the lender may hike up your interest rate as high as 25 percent and charge you late fees. If you go over the credit limit, you can also be assessed over-limit fees. If you do have a credit line, check your terms and conditions to find out what happens if you miss a payment or if you go over your limit to avoid a disaster.
Home Equity Lines of Credit
Another common form of open-end credit is a home equity line of credit. If you own your home, you may be able to apply for a HELOC if you have equity in the property - that is, if your house is worth more than you owe on it. The bank will conduct an appraisal and will give you a line of credit based upon how much the house is worth. You can use a HELOC for things like home repairs and home improvements, or you can use it to pay down other debt. The lender will get a second mortgage on your home; because of the extra security offered by the mortgage, a HELOC typically has a much lower interest rate than a credit card.
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.