What Is an Open-Ended Account?

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

An open-ended account has a revolving balance that varies each month. You can borrow from it repeatedly if you continue to repay.

There are many types of open-ended accounts, and the way you use them can be an asset or a detriment to your finances.

Definition and Example of 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.

  • Alternate Names: Open-end credit, revolving loan

A credit card is the perfect example of an open-ended account. 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.

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.

Types of Open-Ended Accounts

Some types of open-ended accounts are:

Some accounts have a grace period, meaning that 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.

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. Once you've paid it back, there's not an option to borrow again.

Advantages and Disadvantages of Open-Ended Accounts

The major advantage to open-ended accounts—easy access to funds—can also be a disadvantage if it leads to overspending.

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 your credit score is calculated. 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 that you'll catch up, your account will go into default and will 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 Lengths 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, or "revolving credit," gives the borrower an amount to draw from that can be continually reused as it's paid.
  • Credit cards are the most common form of open-ended accounts, though there are many types.
  • A good payment track record can result in an increased credit line to use.
  • Missed payments will affect your credit score and your future ability to borrow.

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