What Is an Open-Ended Account?

Open-Ended Accounts Explained

Woman pays for clothing purchase with credit card
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An open-ended account has a revolving balance that varies each month. You can borrow from it repeatedly if you continue to repay.

What Is an Open-Ended Account?

Open-ended accounts have pre-approved credit limits that allow you to carry an outstanding revolving balance at any given time. You must pay a low minimum balance by the due date. Transactions that exceed the pre-approved limit are typically declined and not processed.

These accounts give you more flexibility on the amount you borrow at one time. You can use a little or a lot of the credit that's available to you, depending on what you need. You also have flexibility in how you repay what you've borrowed.

You can repay the minimum one month and more than that in another month, based on your available cash flow. Then you can use it again.

  • Alternate Names: Open-end credit, revolving loan

Types of Open-Ended Accounts

Some types of open-ended accounts are:

  • Credit cards
  • Home equity lines of credit
  • Unsecured lines of credit

Some accounts have a grace period, meaning no interest is charged if payment is made in full in one cycle. It's typical for credit card interest rates to be higher for cash advances than for purchases.

How Open-Ended Accounts Work

With an open-ended account, you have permission to use as much of your approved limit as you choose, as long as you pay it back as you draw it down.

Your open-ended account will remain in good standing if you make your payments as agreed. Steady and consistent payment can lead to an increase in your balance limit.

If you fall behind, your account will go into past-due status. The creditor will take action to get you to bring the account current.

It will call you, send you letters, and report your late payments to the credit bureaus. This can affect your credit score and result in higher interest rates on other credit cards you might hold.

Alternatives to Open-Ended Accounts

Installment loans such as auto loans are another way to borrow money. However, these types of loans generally charge interest on the entire amount borrowed and do not offer the flexibility of a variable repayment. Also, once you've paid it back, there's not an option to borrow again.

Disadvantages of Open-Ended Accounts

Easy access can lead to overspending.

Are There Any Penalties?

Missed payments on open-ended accounts can trigger penalty charges and a stiff increase in the interest rate charged. The creditor will also report your late payments to the credit bureaus, which will affect your credit score.

Missed payments carry heavy weight in how the score is calculated, and a lower score affects your ability to borrow in the future.

An account that is past due will prompt the creditor to take action to get you to bring the account current. It will call you, and send you letters, in addition to reporting your late payments to the credit bureaus. This can also affect interest rates on other credit cards you hold.

After a certain number of missed payments with no indication you'll catch up, your account will go into default and be frozen by the lender. The clock for the statute of limitations begins ticking when there's no longer any activity on your account. Some creditors will sue you for the unpaid debt, but they must do so before the statute of limitations runs out. Open-ended accounts have the shortest statute of limitations in many states. The table below shows the number of years by state that a lender has to sue for an unpaid debt. Making any payment, even a partial one, restarts the clock.

State by State Statute of Limitations Length for Open-Ended Account Debt
State Years State Years
Alabama 3 Montana 8
Alaska 3 Nebraska 5
Arizona 6 Nevada 4
Arkansas 5 New Hampshire 3
California 4 New Jersey 6
Colorado 6 New Mexico 4
Connecticut 6 New York 6
Delaware 3 North Carolina 3
Florida 5 North Dakota 6
Georgia 6 Ohio 8
Hawaii 6 Oklahoma 5
Idaho 5 Oregon 6
Illinois 5 Pennsylvania 4
Indiana 6 Rhode Island 10
Iowa 5 South Carolina 3
Kansas 3 South Dakota 6
Kentucky 5 Tennessee 6
Louisiana 3 Texas 4
Maine 6 Utah 6
Maryland 3 Vermont 6
Massachusetts 6 Virginia 3
Michigan 6 Washington 6
Minnesota 6 West Virginia 10
Mississippi 3 Wisconsin 6
Missouri 5 Wyoming 10
Length of time a creditor has to sue a debtor, in years, to recover an unpaid debt.

Key Takeaways

  • Open-ended credit gives the borrower an amount to draw from that can be continually reused as it's paid.
  • This is also known as revolving credit, and a credit card is the most common form.
  • A good payment track record can result in an increased credit line to use.
  • Missed payments will affect your credit score and future ability to borrow.