What is Open-End Credit?
Open-end credit works in so many ways. You qualify for an amount of money and can borrow as little or as much of that money just as you prefer. Once you have paid your balance back either in part or in full. You can re-borrow the money, without talking about the terms of your loan.
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Open credit is a pre-approved loan between a lender and a borrower. It allows the borrower to make repeated withdrawals up to a certain limit.
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Open–end credit includes things like credit cards, which give you a spending limit rather than giving you all the money at once.
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Examples of Open-End Credit
Here are examples of the types of open-end credit:
- Firstly, Home equity lines of credit, or HELOCs.
- Department store credit cards.
- Credit cards for the service station.
- Credit cards issued by banks.
- Overdraft protection for checking accounts.
How Open Credit Works
Where a lender and a borrow enter into a term for an open-end line of credit. The lender allows the borrower access to and use of funds. The borrower on the other hand. Usually agrees to make timely payments to the account for any active debts.
Now the terms set out for a high amount that the borrower can borrow at any particular time. This is with interest charged on the balance yet to be paid on the account. Thus the borrower is to make interest. And principal payments hinged on the balance yet to be paid on the account.
The high amount of credit that is open to the customer is known as the revolving credit line. The limit is revisable also the borrower can request a rise in credit limit if the limit is not enough for what they want it for. The lender may opt to raise the limit if the borrower has made timely payments to the account and if the borrower’s credit history is clean.
On the other hand, the lender can reduce the borrower’s credit limit if the borrower begins to default on refund or their credit score declines. If the borrower makes payment to the open-credit account, the funds become open to being lent again. The borrower can use the credit as long as they do not exceed the revolving credit line.
Advantages of Open-End Credit
- An open-end credit makes money open to borrowers if and when it is needed. On the whole, it is not good for a borrower to borrow money every now and then every two or three months and have it repaid in full.
This is where an open-end credit becomes useful. This is because it solves such a problem by making credit open for use if and when it is needed without the borrower to make a refund by a specific date. Rather, it enables them to again use the money and make timely payments before the limit is attained.
- Borrowers benefit from lower interest rates on loans since the interest is only charged on the outstanding amount of loans instead of on the unutilized loan portion. This makes open-end credit an ideal option for a self-employed individual with an unpredictable income.
Disadvantages of Open-End Credit
- Since open credit accounts are unsecured credit, with no collateral attached to them, thus they tend to attract a higher interest rate than secured loans from banks and credit unions. Additionally, the lender charges a monthly or annual maintenance fee for keeping the credit account open, plus the overall cost of running the open-end account.
- With open-end credit, there may be unexpected changes in credit terms. The terms of the credit can change at any time. The lender may decide to increase the maximum credit limit if the borrower’s credit rating improves. Note also that the credit limit can be reduced at any time if the lender believes that there is an increase in credit risk or a decrease in the credit score.
Closed-end Credit vs. Open-end Credit
Both closed-end credit and open-end credit are different based on how funds are disbursed as well as how payments are made to the account. Closed-end credit is where the amount borrowed is provided to the borrower upfront. The credit is gotten for a particular purpose, and the borrower is expected to pay the entire loan, including the interest and maintenance fees, at the end of the set period.
When monthly installments are made, the balance owed to the lender keeps decreasing. This is as opposed to an open-end credit, where the borrower can withdraw funds again after payment. In a closed-end, credit cannot be withdrawn a second time.
Open credit is more accommodating because it is not restricted to a particular purpose. The borrower can access as much or as little money as they need as long as they make on-time payments to the account.