Open-end credit: Definition, examples and more

Open-end credit accounts allow borrowers to tap into a predetermined pool of money at their discretion. It’s open-ended because typically there’s no set expiration date.

Open-ended accounts are also called revolving credit accounts. The money revolves as it’s borrowed and repaid. Use funds to make a purchase? The amount available goes down. Repay it and the pool of money is replenished.

What you’ll learn:

• Open-end credit enables repeated borrowing.

• Credit cards, personal lines of credit and home equity lines of credit are examples of open-end credit accounts.

• Open-end credit often has a credit limit.

• Open-end credit could be secured or unsecured debt depending on whether collateral backs the loan.

In the world of borrowing, you’ll come across two types of credit accounts: open-end credit and closed-end credit. The difference between the two accounts is simple.

With an open-end credit account, such as a credit card, you could borrow money periodically—usually up to a certain limit without a specific date for paying off all the money that’s owed. Lowering the amount you owe by making regular payments frees up more money to borrow. Open-end credit is also known as revolving credit.

With a closed-end account, such as an auto loan or personal loan, you borrow a set amount of money and receive it in one lump sum. You then pay off the loan before a specific date by making regular payments.

Open-end credit involves a lender approving an established pot of money for a borrower. Credit cards are a common kind of open-end credit. Generally, the borrower can use the money as they need it as long as they keep the account in good standing. Unlike some closed-end credit accounts, with an open-end account, there’s no set date for repayment of all the borrowed money.

Here’s an example to show how it works: Say a credit card issuer approves a card with a $5,000 limit. If the cardholder makes purchases on the card totaling $500, the available credit drops to $4,500. If the borrower repays the $500 without adding to what’s owed, the full amount becomes available again.

For an open-end credit account, a lender charges interest only on the amount borrowed and not on the untapped credit. Generally, a borrower must make monthly payments against what they borrow.

Examples of open-end credit include credit card accounts, personal lines of credit and home equity lines of credit.

With a credit card, a cardholder borrows money up to an established credit limit. But there are sometimes exceptions.

It might help to think about every purchase as a short-term loan. Generally, a cardholder pays interest on credit card debt unless the balance is paid off in full each month. Interest is typically charged only on the amount that’s used and any balance that’s carried over.

A personal line of credit is an open-end credit account from a bank, credit union or other financial institution that lets a borrower tap into available money as needed. If the debt is unsecured, there’s no collateral required.

A borrower might use money from a personal line of credit to pay for a home improvement project, cover medical bills or pay for education expenses.

Like a credit card, a personal credit line often has a credit limit. And it requires monthly payments on outstanding balances.

A home equity line of credit (HELOC) allows a homeowner to borrow money against their home equity. According to the Consumer Financial Protection Bureau, the amount is a percentage of the appraised value of the home minus what’s owed on the mortgage.

The money can be borrowed during what’s known as the draw period, such as 10 years. One potential risk to a HELOC is that the home serves as collateral. So getting behind on payments could mean foreclosure.

Open-end credit can affect a borrower’s credit scores based on how the loan is used. Two major factors are payment history and credit utilization ratio. Credit age and credit mix could also change. 

To stay on top of your open-end and closed-end credit, you can monitor your credit with CreditWise from Capital One and get free credit reports from AnnualCreditReport.com. CreditWise is free for everyone. And using it won’t hurt your credit scores.

Open-end credit can provide financial flexibility that can be borrowed and repaid over time. Unlike closed-end credit, there’s typically no defined end date.

Looking for a credit card? You can compare Capital One credit cards and see if you’re pre-approved without harming your credit scores.