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Credit may be seen as a contract between two persons or parties in which one borrows some resource of value from 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 borrower or debtor while one who is 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 any kind of held back payment. Purchasing an asset on cash loan or buying something from market using credit card is an example of credit. In either case, you are making a purchase but not paying the value at that time, but making a promise of clearing the debt later on. It is offered by a creditor to a debtor. It may or may not involve money. Idea of credit applies in barter economies or exchange purposes also which involves commuting goods and services.
Term credit can be used in two contexts. One is in commercial trade, as trade credit and other at personal level as consumer credit. Commercial credit is a part of purchase agreement of many companies, approving their customers for delayed payment of purchased resources. 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.
Other 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, 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 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. Follow here to give them a glance.
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 past. It tells credit reputation of the person, as details of bankruptcy and delay in payment are also a part of this report. 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 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 credit history of a person. Failure of checking creditworthiness 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 creditworthiness of applicant 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 solved.
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