Credit may be seen as a contract between two persons or parties in which one borrows some resource of value from the other but without paying for it immediately and making arrangements to pay for it or returning the resources later as per the contract. In this process, a debt is generated between two parties. The person receiving resources is a borrower or debtor while the provider is called lender or creditor. Resources that are provided are either in the form of finance or goods or services of any kind. In short, credit is a type of payment that is held back for a certain period of time. Purchasing an asset on loan or buying something from the market using credit card is an example of credit. In either case, you make a purchase but do not pay the value at that time and instead, making a promise of clearing the debt at a later date. It is offered by a creditor to a debtor. It may or may not involve money. The idea of credit applies in barter economies or exchange purposes also which involves commuting goods and services.
The term credit can be used in two contexts. One is in commercial trade, as trade credit and other at a personal level as consumer credit. Commercial credit is a part of the purchase agreement where companies approve their customers for delayed payment of resources purchased. A credit manager is employed for managing credit records and keeping knowledge of clients that are financially unstable, as credit is not offered to such customers.
Another one is consumer credit that means offering goods or services to an individual in exchange for payment that is made later on. Mortgages, credit cards, loans, etc. are examples of consumer credit. But at the time of payment, the cost of credit includes additional surcharges over borrowed amount. Interest, arrangement fee and sometimes credit insurance are paid while paying back credited amount. Some legislative authorities mandate it to cite all charges in the form of percentage for giving a debtor an accurate estimate of the amount that he will have to pay while reimbursing the debt. This percentage excludes non-obligatory charges.
Other terms associated with credit are Credit report, Credit score, and Credit risk. You can seek advice of Your Personal Financial Mentor when you are planning to apply for credit because he will guide you how to apply and how to establish a good credit history. Moreover, he can also explain you the terminologies in detail and provide you a good understanding of the technical terms associated with the credit.
Credit report, it is also known as credit history and is a record that keeps track of a firm or soul’s acts of borrowing and repayment in the past. It tells the credit reputation of the person, as details of bankruptcy and delay in payment are also a part of this report. The credit bureau is the body that maintains credit records. Banks, stores, credit card companies and other lenders are required to provide credit bureaus with accurate information about their customers because when a person applies for credit, he has to fill out an application form; its contents like name, address and other information are matched with information in the credit bureau’s records to check credit worthiness of credit applicant. If approved, only then the credit is sanctioned.
Coming to credit score, it is the score based on statistical analysis of the credit history of a person. Failure of checking the credit worthiness of a person may result in danger of loss due to non repayment of credit.
Receiving credit is not so easy, nor is lending credit. For a creditor, it is mandatory to check for credit worthiness of applicants so as to avoid loss of your money. At the same time, it is important for a genuine credit-seeker to maintain his credit reputation so that his purpose is fulfilled.