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What is Credit?

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We are constantly urged to accept credit card offers or purchase items on credit. But what is credit? Credit allows customers to purchase something immediately and pay for it later. The money is borrowed from creditors and the customer can pay the creditor over time, rather than paying at the time of purchase.

There are two basic types of consumer credit transactions: open-end and closed-end.

An open-end credit account is one under which you can make repeated purchases or obtain money. You can either pay the balance in full or in installments. For example, if you purchased a new air conditioner with a credit card, that purchase is part of an open-end credit plan. You could use the same card at a later date to purchase something different and not have to enter into a new agreement with the creditor. You also would not have to make a preset number of payments to payoff the balance.

Other open-end credit examples include: gas cards, credit cards like MasterCard and Visa, checking account overdraft protection programs, and revolving charge accounts. There is no limit on the interest rate that businesses can charge for open-end credit.

Closed-end credit is credit extended for a specific amount and a set time period. For example, if you purchased the same air conditioner as above under a closed-end agreement, you would have to make a certain payment for a set number of weeks or months.

Other examples of closed-end credit include: auto loans, mortgages, and personal or home improvement loans. In Wisconsin, closed-end credit agreements also have no rate limits.