Open Credit

Understanding open credit is essential when it comes to your personal finances. This comprehensive guide will tell you everything you need to know about open credit, including what it is, how to get it, and the benefits and drawbacks of using it. We’ll also provide some tips on making the most of open credit to improve your financial situation.

So whether you’re just starting out on your own or you’re looking for a more secure financial future, read on for all the information you need about open credit.

What is Open Credit?

Open credit is a type of credit that allows a borrower to draw down funds within an agreed limit. Open credit, also known as open-end credit does not have a defined term and can be drawn down and repaid as required by the borrower. However, what makes open credit something to think about is the fact that you can continue to take out credit up to an agreed, predetermined amount. As you make repayments and pay back that money, then the credit becomes available once again.

For example, let’s say you have a £1,000 overdraft limit, this is £1,000 of open credit. You can spend and use it as you please and repay it as you please without asking for your lenders consent each time. Then, when you get paid, the credit is renewed and paid back, but you have instant access to it again, meaning you can continue to use it as you did before.

Open credit can also be referred to using the following names:

Line of credit
Revolving credit
Revolving credit facility

How does Open Credit work?

Open credit allows you to borrow and repay funds within an agreed facility as you wish. The amount of open credit that you can have varies from lender to lender. However, most banks and building societies offer an overdraft facility on current accounts for borrowers with a strong credit history. This is a form of open credit, and the amount you can spend will be agreed upon when you open the account.

It’s important to remember that just because you have an open credit facility doesn’t mean you should use it all the time or that you shouldn’t try to stay within its limit. If you consistently go over your agreed over-limit, you may find that your bank charges you higher fees or interest, or completely withdraws the facility.

You’ll typically find forms of open credit in the way of an overdraft, credit card, or business revolving credit facility. These are the kinds of credit you’ll use the most throughout your loan, usually being used when you find yourself in situations like an emergency, making a large purchase, or needing to consolidate other debts.

What is the interest rate on open credit?

The interest rate on open credit varies depending on the lender and the type of credit you’re using. Generally, open credit comes with a higher interest rate than other types of credit because it’s unsecured. For example, an overdraft usually has an annual percentage rate (APR) of around 18%. This means that if you have a £500 overdraft and don’t repay it for a year, you’ll pay £90 in interest. In comparison, the APR on a typical personal loan is around 12%.

Usually, your credit score won’t affect your interest rates too much, although it will affect your initial eligibility. That said, if you’re unable to keep up with payments or you stay in debt for a long time and you find yourself maxing out your credit limit over and over again, then this can negatively affect your credit score.

Again, the interest rate you’ll have on your open credit will depend on the credit type and your provider (some may offer deals like Barclays do, offering lower interest rates on your overdraft when you take out a Tech Cover plan with your current account), but averagely the rates will sit between 19% and 40%.

What are the advantages of Open Credit?

To figure out whether open credit is the best option for you, you’ll want to look at its advantages. Here’s a table for a quick reference of such credit’s advantages and disadvantages, with a more in-depth look below:

Advantages of Open Credit	Disadvantages of Open Credit
You can have access to credit as and when you need it, with no need to apply after the initial time.	Interest rates tend to be higher than most other forms of credit because they’re unsecured.
You can spend your open credit on whatever you want.	The terms and conditions of open credit can change at any time, as can your limits.
You can change and adjust your credit limits as and when you please.	If you have financial difficulties and max out your credit limit repeatedly, this can negatively affect your credit score.
Flexibility when it comes to paying back your credit when you’re ready.

Readily available credit on demand – One of the main advantages of open credit is having money available to you when you need it. This means that if an emergency situation comes up or you need to make a large purchase, you can do so without worrying about being declined for credit.
Flexible spending – Another advantage of open credit is that it’s flexible. This means you can use as much or as little of the credit as you need, and you’re only required to pay back what you’ve used plus interest and fees. This can be helpful if you have a variable income or unexpected expenses come up.
Flexible credit limits – Open credit also usually comes with flexible credit limits. This means that if you need to borrow more money, you can do so without having to reapply for credit.
Payback when you’re ready – You also usually have the flexibility to choose when you make your repayments with open credit. This means you can make repayments that work for you and your budget.

What are the disadvantages of Open Credit?

The disadvantages of open credit are:

High interest rates – One of the biggest disadvantages of open credit is that it generally has high-interest rates. This means that if you’re not careful, you can end up paying a lot of money in interest and fees.
Variable terms and conditions – Another disadvantage of open credit is that the terms and conditions can be variable. This means that your interest rate, credit limit, and other factors can change without notice. This can make it difficult to budget and manage your finances if you’re not prepared for changes.
Credit terms can change any time – Hand in hand with the consideration above, the terms can change at any time. This means that your interest rate, credit limit, and other factors can all be changed without notice. This can make it difficult to budget and manage your finances if you’re not prepared for changes.
Can negatively affect your credit score – One final disadvantage of open credit is that it can negatively affect your credit score. This is because open credit generally has high-interest rates and if you’re unable to keep up with payments or you find yourself maxing out your limit, it can damage your credit score.

Is Open Credit beneficial?

Yes, open credit can be beneficial if used correctly. It can give you access to funds when you need them and can be helpful in managing your finances. However, it’s important to remember that open credit can come with high-interest rates and variable terms and conditions. This means that you need to be careful about how much you borrow and make sure you’re prepared for changes. Open credit can be a helpful tool if used correctly, but it’s important to understand the advantages and disadvantages before making a decision. Be sure to do your research and carefully consider all your options before deciding if open credit is right for you.