When you sign a credit card agreement, you are agreeing to an ‘open-ended’ line of credit. What does this mean, and how does it affect you?
Honestly, there is nothing to worry about here. If you think about the types of credit, there are really only two types that will affect most people. The first is credit card debt, and the second is something like a car loan or mortgage. If you think about it, the differences are pretty easy to spot:
With a traditional, or ‘close-ended’ (or fixed term) loan, like a car loan, you will have a payment schedule. Every month you will pay the same amount based on what you borrowed, the interest rate, and the number of months you have agreed to make payments in order to pay the car off. There is no variation in the payments. If you miss a payment, you owe that payment plus the next one as a lump sum. If you end up needing to change the terms of the loan, you will need to sign paperwork with your lender agreeing to what the new terms are. In many cases, these loans are secured by an asset
Let’s look at a credit card account as a contrast to a traditional loan. There is no way you, or your lender, can know exactly how much you will spend, or how much you will pay, on your card. Because there is no set payment schedule, and no amount that you will consistently owe, there is no way to calculate a payment persistently across the life of the loan. In addition, the length of time you will borrow the money is also unknown. Because these are all unknown variables, these types of loans are called ‘open-ended’.
Each state has its own rules for the statute of limitation for an open-ended loan vs. a traditional loan. Other than that, from a collection or legal standpoint, there really isn’t a lot of difference.
