Open-End Credit is a form of loan that is granted to a credit holder as a pre-approved loan. It allows the credit holder to purchase goods and pay for services from a merchant through a third party known as the credit issuer. The credit holder is given a credit line up to a certain limit from which they can pay the goods and services they are purchasing. The credit issuer on the other hand will be responsible for paying the goods and services bought from the merchant. In this case, the credit issuer is holding on to a promise made by the credit holder to pay for the purchases on a future date.
A credit line is equivalent to the pre-approved loan that a credit issuer grants the credit holder. This credit line is usually up to a certain amount which is referred to as the credit limit. The credit holder may make purchases within the credit line. There is no fixed payment that is needed to be paid by the credit holder. Payment is computed based on the outstanding balance that the credit holder currently has. The payment requirement is only limited to a minimum amount due which is a percentage of the outstanding balance.
The use of the credit line allows the credit issuer to earn by charging a certain interest rate for the amount used and other finance charges when the credit holder defaults. Common payment terms that is granted by the credit issuer is a monthly basis where payment due needs to be paid at a certain due date.
There are two common types of Open-End Credit which is granted by the credit issuer. First is in the form of credit card where the credit holder receives a card with a magnetic strip containing information about the credit holder and the pre-approved credit line. This card is then used on a merchant’s terminal to inform the credit issuer of the purchase. Once the credit issuer approves, the transaction is deemed complete.
The second type is known as the Home Equity Line of Credit (HELOC). It works in the same way as a credit card. The Difference is that a HELOC is best used for large expenses such as home repairs or as a second mortgage. It also has the flexibility to be used on other ongoing expenses like tuition fees or medical fees.