Differences Between Open-End Credit & Closed-End Credit


Open-end and closed-end credit accounts differ in the way creditors and lenders handle them, as well as consumers use them. The biggest purchases that people make in their lifetime often are associated with closed-end credit accounts.

Open-End Credit

You can make repeat purchases with an open-end credit account or get cash advanced to you through the account if the creditor provides that option. Credit accounts supplied by MasterCard and Visa generally are open-end accounts. The Wisconsin Department of Financial Institutions (DFI) differentiates open-end from closed-end accounts by noting that consumers aren't required to enter into new credit agreements each time they use the accounts. For example, you can buy a lamp with a Visa credit card one day and a vacuum cleaner the next day without having to enter into a new agreement with Visa to make each purchase.

Closed-End Credit

Auto loans, mortgages and personal loans are examples of closed-end credit, according to the Wisconsin DFI. Closed-end credit contracts involve dispensing a specified amount of money to a borrower in full one time. The borrower must repay all the money and interest charges by a specific date. The borrower typically is required to make payments on the loan in a specified amount for a set number of weeks, months or years until the full amount is repaid. Changes in closed-end credit contracts typically require the borrower to enter into a new financing agreement with the lender.

Credit Agreements

You usually have to sign an agreement that cites the interest rate and other terms associated with an open-end or closed-end account before you're obligated to meet the terms. However, the Indiana DFI indicates that credit cardholders obligate themselves to meet a card issuer's terms in several ways. Cardholders essentially accept issuers' terms by signing a credit application that's later approved, using a new credit card and signing the sales slip for the first purchase they make with a card.

Triggering Terms

Lenders often advertise terms for mortgages and other closed-end credit accounts, but the Indiana DFI indicates that other major terms must be revealed if "triggering terms," or words specified by the Federal Trade Commission, are included in the ad. With closed-end credit, a lender may advertise mortgage loans that require only a 10-percent down payment. In such cases, lenders are required to reveal potential interest rates and other major terms to avoid misleading consumers by advertising only the most appealing terms. Other triggering terms apply to open-end credit ads. For instance, credit card issuers who advertise when a card's finance charge begins to accrue also must reveal membership fees and other fees to potential cardholders so that they understand the true cost of having the card.

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