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30-Day versus Open Credit

Dear Jeff,
I wanted to apply for a credit card. This is the first credit card that I’m applying for
. So I’m new to all of this and don’t quite understand all of the details that the credit card companies seem to expect. I do not understand what an open 30-day credit line is. What does that mean and how is it different from other credit cards like Visa? Please help, I don’t want to wind up with problems right out of the gate.

Laura R.
Ontario, Canada

Hi Laura,
It’s a good thing that you’re doing the due diligence on this and following up because there are big differences in how creditors expect you to pay back debt. You could’ve gotten into a lot of trouble simply because you didn’t understand the type of credit you applied for and how it works.

Here is a quick breakdown of everything you need to know. I’ll give you some advice on choosing the right first credit card below after we get through the basics…

Different types of debt work in different ways. The difference is usually in how much credit you get AND how that debt is paid back.
The first difference is between “closed credit” and “open credit”. These are basically fancy names for loans and credit cards respectively.
A loan is “closed credit” because you borrow a finite amount of money that gets paid back over a set period of time.
“Open credit” describes credit cards because you don’t borrow a certain amount over a certain time. Instead, the creditor provides a credit limit and you can borrow up to that amount anytime you, please. Then you can keep borrowing as long as you pay the balance down according to your set payment schedule.

Now, when you’re talking about open credit lines, you have two options for paying off your debt:
The most common is called a “revolving” credit line. The amount you pay every month is not set. Instead, it changes based on a formula assigned by the creditor. The more you borrow, the more you’ll be expected to pay. However, you can carry a balance from one month to the next as long as you make the minimum required payment.

With a less-common 30-day credit line, you have to pay everything back that you’ve borrowed at the end of the month.
There are pros and cons to each. Which one you choose really depends on how you plan on using the card.
If you’re planning on using the credit card to make smaller everyday purchases in an effort to help build credit, then a 30-day credit line may be a good option. You’ll pay off your debt every month so you won’t have any outstanding debt that will cause problems. On the other hand, if you’re using the card to make large purchases so you can spread out the cost of big-ticket items over time, then a 30-day credit line is a bad idea. That is because you won’t have the means to pay off the debt by the end of the month; a revolving account may work better.
So it really depends on how you plan on using the card. I should warn you, there’s another important distinction between credit cards that you may encounter if this is your first credit card and you don’t have much information in your credit history. As a new credit user, companies may require you to get a secured credit card instead of an unsecured card.

With a secured card, you need to put down a deposit in order to open the credit line. Creditors sometimes do this for new credit users and people with low credit scores because they don’t want to extend credit in case you fail to pay back what you borrow. An unsecured credit line doesn’t require a deposit. The creditor extends the line because your credit score is strong enough that they have a fair amount of trust that you can pay the debt back.

There are secured versions of both 30-day and revolving credit cards. Therefore, you can go either way even if you don’t have strong enough credit to qualify for unsecured cards. I’d recommend looking at your budget. Think about how you want to use the card. Weigh the decision carefully before you choose the card that’s right for you.

Jeffrey Schwartz
Executive Director

Jeffrey Schwartz is the Executive Director of Consolidated Credit Canada and Former President of the Credit Association of Greater Toronto (CAGT).

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