30-Day versus Open Credit

Not all credit cards are created equal – here’s the difference between 30-day and revolving.

I wanted to apply for an American Express credit card, but my mother told me to be careful because it doesn’t work like a normal card. Admittedly, 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 tried looking into it on my own and what I’ve found seems to say Amex is an open 30-day credit line. What does that mean and how is it different from other credit cards like Visa or MasterCard?Please help, I don’t want to wind up with problems right out of the gate.

Laura R.
Los Angeles, California

An expert answer from Gary Herman

Hi Laura,

Type of credit impacts how creditors expect you to pay debt backIt’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” – this is 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 s 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.

Visa, MasterCard and Discover are all usually revolving credit lines. On the other hand, most American Express accounts are 30-day credit line. 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 30-day credit line is a bad idea, 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’s 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.

Secured credit cards require a deposit to open the credit lineWith 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, so 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, thinking about how you want to use the card and weighing the decision carefully before you choose the card that’s right for you.

Gary Herman
President of Consolidated Credit

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