Credit Limit vs. Term Limit
You do not have a term limit on a line of credit or a credit card. That means you have no deadline for paying back the balance. However, you do have a credit limit. You can only borrow so much money. Once you reach that limit, your borrowing privileges will be suspended until you pay at least part of the principal down.
Minimum Payments
The bank or credit card company sets minimum payments that are due on open-term loans. You must ask the lending company what the minimum payments will be an amounts you intend to borrow. As long as you meet these minimum payments, you can continue using the remaining principal. In practice, this means that if you are at your limit, you can make a payment and borrow back the same amount as that payment.
Accumulated Interest
Be careful about how much you pay in interest on open-term loans. Because these loans do not end until you pay them off completely, you incur interest each month you owe money. This amount cannot be defined like it can be for closed-ended loans. In fact, lenders can tell you exactly how much interest you will pay on a closed-ended loan. Open-ended loans, however, can cost you interest indefinitely, and unless you monitor how much interest expense you accumulate over time, you could pay more interest on an open-term loan than you would on a closed-ended loan.
Credit Reporting
A credit-card lender reports your payment history to the credit-reporting agencies, and a bank reports your payments on your line of credit. The danger with a line of credit is that you might have a tendency to borrow the maximum and not pay it back quickly enough. When you borrow near your maximum line of credit, you can negatively affect your credit rating, because part of your rating depends on how much of your available credit you use. Though you do not have to pay off a line of credit by any specific deadline, you should strive to keep the balance low in order to protect your credit score.
No comments:
Post a Comment