The Three Types of Credit

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Need to know what the three credit types are?  Read this to find out.

Closed End Credit – Open End Credit

There are three basic types of credit you should know about and understand.
They are closed-end credit, open-end credit, and open credit.  Some folks I’ve discussed these credit types with didn’t realize they were dealing with credit at all!   If you want to know for sure read this post!

Closed-End Credit

Closed-end credit refers to loans that require fixed payments at regular time intervals. Thus, their other name: closed-end loans. This type of credit requires payment in full at a specific point in time in the future.  Of course, financial charges and interest come along for the ride.  The amount you pay at each time interval does not change.  Another name for closed-end credit is installment credit.

The two most common examples of installment credit agreements are loans for home mortgages and to purchase cars.

Closed End Credit – Open End Credit

Other examples include:

• Student Loans
• Home Improvement Loans
• Recreational Vehicles (boats, RV, ATV)
• Appliances (refrigerators, stoves, air conditioners not paid for using a credit card)

closed end credit | open end credit

Open-End Credit

Revolving accounts are pre-approved loans between a lender and a borrower.  With a revolving line of credit you can use and withdraw money at any time up to the pre-approved specified dollar amount of the loan.  This type of credit requires that only a minimum payment of the outstanding balance.

However, at the end of a billing cycle (usually one month) you can pay back the balance in full if you choose to.  Unpaid amounts carry over to the next billing cycle.  This unpaid amount accrues interest. Another name for open-end credit is revolving credit.

Closed End Credit – Open End Credit

The two most common examples of revolving credit are credit cards from banks with annual percentage rates and home equity lines of credit.  Overall, this is the most common consumer credit issued.

Other examples include:

• Overdraft protection (bank)
• Store charge cards
• Gasoline station charge cards

Open Credit

Open credit refers to accounts which you pay for services provided.  With open credit there is no predetermined credit or transaction limit.  The bill varies from one billing cycle to the next.  The payment is not the same each month and is due at the end of the billing cycle (usually a month).  Typically, these accounts call for full repayment each billing cycle.  If they aren’t paid you’ll get slapped with finance charges and fees.

The two most common examples of revolving credit are utility companies and cellular service.

Other examples include:

• Gasoline station charge cards (some)
• American Express cards (some)

Remember to read the disclosures. Now you are “in the know” about the three types of credit!

Related posts:

  1. How To Establish Credit in 3 Steps
  2. How to Take Control of Your Credit Cards: Eliminate Credit Card Debt
  3. Are You Credit Card Phobic?
  4. 3 Credit Card Alternatives That Curb Over-Spending

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