An open-ended credit account, also known as a revolving account, is a credit plan in which the creditor has a reasonable expectation of repeated transactions, stipulates the terms of those transactions, and provides for a finance charge that may be computed periodically on any outstanding balance. Credit cards and lines-of-credit are examples of open-end accounts. In actuality, a credit card is simply a loan from a lending institution (the issuing company) that pays the merchant when it receives a loan document (a credit card receipt) from the merchant. The lending institution then sends the cardholder an invoice.
Before opening any type of open-ended consumer credit plan, the creditor must disclose to the consumer each of the following items, to the extent that they apply to the particular account:
- The conditions under which a finance charge may be imposed, including the time period given in which any credit extended may be repaid without incurring a finance charge (known as a grace period). If no grace period is provided, the creditor must make this known.
- The method of calculating the balance upon which a finance charge will be imposed.
- The method of calculating the amount of the finance charge, including any imposed minimum or fixed amount.
- If different rates are used to calculate finance charges in different time periods, each rate and the range of balances to which it applies, along with the corresponding annual percentage rates (APRs).
- Any other charges that may be imposed as part of the account, and their method of computation.
- When the credit is or will be secured, a statement giving notice that a security interest has been or will be taken in either the property purchased as part of the credit transaction, or other specifically identified property not purchased as part of the transaction.
- A statement of the protection provided with regard to the creditor's and the borrower's responsibilities.
After credit has been extended, the creditor will send statements to the accountholder. In each billing cycle certain information must be provided, including:
- The account's outstanding balance at the beginning of the statement period.
- The amount, date, and a brief description of each extension of credit during the period.
- The total amount of payments credited to the account during the period.
- The amount of any finance charges added to the account during the period; and if more than one rate is used (for example, a cash advance interest rate is often different from a standard purchase rate), a breakdown of the charges.
- The total finance charge billed as an APR.
- The balance (and a statement of how it was determined) on which the finance charge was calculated.
- The account's outstanding balance at the end of the period.
- The date by which payment must be made in order to avoid additional finance charges.
- The address where any billing inquiries are to be sent.
Creditor penalties for violating any of the above disclosure requirements can include actual damage amounts suffered by the borrower as a result of the failure; twice the amount of any finance charge in connection with the transaction between $100 and $1,000; and any reasonable attorneys' fees and costs incurred by the borrower as part of a successful legal action. Accountholders may have additional legal rights under the Fair Credit Billing Act. For further information, visit the Federal Trade Commission's website.