Question:
What is the difference between open-end credit, and closed-end credit, and what are the costs associated with each?
Answer:
Open-end credit allows you to borrow money repeatedly up to a certain predetermined limit. When you reach this limit of borrowing, you cannot borrow any more until you make some repayments. This type of credit does not have a fixed date by which you should have paid back the loan.
On the contrary, a closed-end credit allows you to borrow a lump sum of money and pay in installments. This kind of credit has a fixed date by which you should have serviced the loan fully.
Cost associated with open-end credit
1. Interest rates
Your lender makes a profit from the interest you pay for the principal you got as credit. The interest rate also allows lenders to meet payable tax to necessary authorities. Interest rates might differ from one lender to another. In your survey, shop for a lender with your most comfortable interest rates.
2. Over-limit fee
If perhaps you have gone beyond your credit card limit, some lenders might penalize you. The fee they charge you for borrowing beyond limits will exist up to a point where you make some payments and lower your credit card debt below or up to your limit.
3. Service fee
There is much that happens behind the scenes for you to borrow money with credit cards. To facilitate smooth transactions between you and your lender, some will charge a fee. The fee will often be reasonable and disclosed.
4. Late payment fee
Even though an open-end credit card has no fixed data to make payments, there is a delayed payment that might cause your lender losses. To compensate for their losses, they might have no other option other than penalizing you for late payments.
Cost associated with closed-end credit
1. Prepayment fee
Closed-end credit lenders do not want you to pay your loan too early or too late. To keep it simple, they want you to pay on time. By paying early, you deny them the opportunity to make some profits from interest on a couple of installments. To discourage you from paying too soon, they will charge you a pre-payment fee.
2. Late payment fee
You may not pay too soon or on time and end up defaulting on your payments. In such a case, you are penalized for missed payment. Lenders will penalize you when you default on an installment payment because you are inconveniencing their financial prospects.
3. Interest rates
Interest rates are universally applicable across a broad of credit cards. It is among the fundamental costs that you will incur when you opt to use closed-end credit to finance a purchase or borrow money.
4. Service fee
To facilitate a smooth transaction of financing your purchase or expenditure, some lenders will require you to pay a service fee. The service fee is used to fund and service interplay input resources responsible for the functionality of your closed-end credit card.
