Whether closed-end or open-end credit, depending on the need, is a type of credit line a person, business or company may take to support their growth. The difference between these two types of credit is mainly in the terms of the debt and the debt repayment.
In this guide, you will learn more about how each type of line of credit works. Insights about Bad Credit Score and how poor credit can affects your social benefits and Credit Loan Application is also on this website. But first, lets know the difference.
- Open-end credit is a type of loan that the borrower can draw money from repeatedly up to a certain pre-approved limit.
- Unlike closed-end credit, it has no fixed end date for repayment.
- When the borrower repays some of the money they have borrowed, it restores that portion of their pre-approved limit.
- Credit cards and lines of credit are examples of open-end credit and some people call it revolving credit.
- Open-end credit is different from closed-end credit, in which the borrower receives money in a lump sum and must pay it back by a fixed end date.
- Mortgages and car loans are examples of closed-end credit.
How Open-End Credit Line Works
Open-end credit is credit that you can withdraw from and repay continuously for an indefinite period of time. Types of open-end credit include a line of credit or a credit card, which others refer to as revolving credit.
Federal Reserve. “Revolving Credit.”
With open-end credit, when you repay what you owe, the amount of credit you have available increases again.
Here are some examples of open-end credit:
Credit Cards
For example, with credit card, the card issuer will set a credit limit based on such factors as the card holder’s income and credit score. If, for example, the limit is set at $20,000, the cardholder can spend up to that much. If they spend $5,000 in a month, they would then have $15,000 left to spend on that card.
Once the cardholder has paid back the $5,000, their credit limit will be back at $20,000. Each month there will also be a charge of interest on their outstanding balance and have to make at least a minimum monthly payment. This cycle can continue for as long as the credit card holder keeps that card. As a bonus, you can see these 5 steps to lower your Credit Card Interest Rate while you use your credit cards. For further guidance, see more resourcs below;
- Cash Back Credit Cards: Types, Comparison, Rewards, Pros and Cons
- How to Negotiate Debt Settlement with your Credit Card Company
- How does Cash Back Credit Card Work for Account Holders?
Personal Credit Line
Lines of credit come in a variety of forms. Personal lines of credit serve much the same purpose as credit cards. In most cases, the borrower can take out money whenever they wish, up to the pre-established limit.
Most personal lines of credit are not secure, meaning that they do not have any collateral from the borrower, but solely based the lender’s assessment of the creditworthiness of the borrower.
Advantages and Disadvantages of Open-End Credit Line
Like any type of credit, open-end credit has both pros and cons to consider:
A major advantage of open-end credit is that the borrower has to pay interest only on the amount they use.
For example, someone with a $50,000 home equity line of credit who has borrowed $10,000 from it so far will only owe interest on that $10,000, not the other $40,000.
If, on the other hand, they had taken out a home equity loan for $50,000, they would start owing interest on the full amount from day one.
Another advantage is that open-end credit can be used for just about any purpose.
Credit cards are the most obvious example, but this is true for lines of credit as well.
Closed-end credit, by contrast, may be on the condition that it is used for a specific purpose, such as to buy a house or a car.
Flexibility is an advantage, but it also has risks as well. Revolving loans may even encourage overspending. That could be a particular danger for someone with multiple credit cards, each with its own credit limit.
In addition, credit cards and other forms of open-end credit often have variable rather than fixed interest rates that can increase.
Read Also
- Advantages and Disadvantages of Joint Mortgage Loan for Family Home
- Advantages of Getting Mortgage Loan to Buy Your House Instead of Renting
How Does Open-End Credit Help Your Credit Score?
Open-end credit can either help or hurt your credit score, depending on how you use it. If you have a credit card, for example, and reliably make at least the minimum required payment each month.
Truthfully, if you don’t miss a payment, it can help your credit score. However, if you max out your card, or get too close to its credit limit, that will affect your credit utilization ratio, which can lower your score.
Conclusion
Open-end loans are useful in a variety of situations and offer flexibility that closed-end loans do not. At the same time, some borrowers can get into an unmanageable amount of debt with them. To stay out of trouble it’s a good idea to keep an eye on your credit limit and try not to get too close to it.
Helpful Guides
- What is Credit Facility? Personal & Business Loan and Mortgage
- Credit Facilities And Loans: The Differences And Characteristics
- What is FICO score and Why is it Higher than Credit Score in Finance?
