Open-end & Closed-end Credit

Open-end Credit

Open-end credit includes credit cards, department store charge accounts, gasoline company cards and checking account overdraft protection. Open-end credit can be used, paid off and used again up to the prearranged credit limits.

The Truth-in-Lending Act requires all lenders of open-end credit to notify the customer—15 days in advance—of any changes in the APR, annual fee, minimum payment or the method used to determine the balance.

Truth-in-Lending also requires the lender to disclose the way the finance charge is computed and the length of any no-interest period. With open-end credit, the finance charge can be calculated three ways:

• Adjusted Balance — The finance charge is calculated after all payments made during the billing period are subtracted from the balance owed. This is the least expensive method.
• Average Daily Balance — The finance charge is calculated on the average daily balance during the billing period. This is the most common method.
• Previous Balance — The finance charge is calculated without consideration of payments made during the billing period. This is the most expensive method.

Closed-end Credit

Closed-end credit is a one-time, lump-sum advance of credit, such as a car or mortgage loan. In a closed-end transaction, a specific amount of credit is advanced for a specific period of time. The finance charge and the schedule of payments for the loan are agreed upon by the lender and you.

The Truth-In-Lending Act requires all closed-end credit providers to disclose the amount financed, the total amount of all payments (amount borrowed plus the finance charges) and the total sales price (total cost of the purchase including down payment).