Personal Finance

Starting an open-end credit

Open-end Credit, also referred as line of credit or a revolving line, is a type of consumer loan provided for the consumers to purchase goods or services. Open-end Credit refers to an agreement by a lender or a bank in which a certain amount of money is lend to a borrower and on its successful repayment, lets the borrower borrow again the same amount only, to be paid back again after a certain period of time, at a later date. In other words, with an open-end credit agreement you can borrow repeated purchases or obtain loans. With open-end credit you are given the privilege of paying the balance in full or you can also pay in installments.

Open-end credit loans are loans which are provided for variable amounts of money up to certain limit. In Open-end credit loans the borrowers need not require to state the reason for applying a loan. Also, in open-end credit loans the lender has no right to foreclose on the loan. One of the best examples of open-end credit loans are bank credit cards. Open-end credit loans features fixed interest rates. That is, the interest rate of the loans will not change till the end of the loan period.

Open-end credit loans need not require any collateral. But the borrowers have to pay interest rates, penalties, or some specific fees according to the terms of the loan. For example, if the consumer fails to pay the credit card charges within the due time, he/she has to pay a penalty for late payment. Generally, open-end credit interest rates are higher than closed-end interest rates as these types of consumer loans are not backed by any collateral security.

Some examples of Open-end credits include:

  • Bank credit cards
  • Home equity credit lines
  • Overdraft privilege on checking accounts
  • Department store or service station credit cards

In most cases, the borrowers have to pay a finance charge (interest) on the unpaid balance of an open-end credit account. The finance charge is the amount a borrower has to pay the lender or bank for being granted credit. If you are able to make payments according to the terms and conditions you agreed while taking the account, your account will not be considered past due.

There are certain things a borrower has to make notice of before making the first transaction under an open-end credit account. The lender or bank will provide you in a single written document with the followings items. Read the document carefully and know the rules and policy.

  • The document will state the conditions under which the lender will impose the finance charges (interest).
  • The period or grace period (as they call it) within which the borrower has to make the repayment to avoid a finance charge.
  • How the lender calculate the finance charge based on the balance due.
  • How the lender computes the total amount of finance charge.
  • The minimum payment a lender has to pay on every billing cycle.
  • Any additional charge a borrower has to pay other than the finance charge.
  • Whether the borrower has to pay an annual fee, if so the amount of the fee.
  • A document which states the customer’s right to dispute billing errors.

Open-end credit loans are made on a regular basic and a borrower will be billed periodically so as to pay at least partial payment. An open-end credit is an ideal option for those who are making their payments according to the terms and conditions of the account.