Credit Related Terms You Should Know

Are you often overwhelmed by a number of credit related terms? Well, in this article we will put you at ease with a few of the credit related terms. Let’s have a look.

Credit

When a person borrows money on loan with the promise to pay it back on a future date with interest, it is called credit.

Credit Agency

To put it simply, credit agencies are companies that work to collect information about an individual’s or businesses’ credit worthiness. The collected information is used to determine if a loan can be granted to the individual based on his borrowing and repayment history. This information can be sold to interested parties. Even the individual himself can buy this information to assess his credit position.

Credit History 

Credit history, in brief is the full account of a person’s borrowing and repayment history. It consists of all the credit accounts an individual uses, the types and since when they have been open, amount borrowed, amount paid, amount owed, repayment pattern, available credit balance, etc. It also contains information about any bankruptcies, collections, etc. In short, it can tell about the credit health of an individual or a business.

Credit Score

To judge the credit worthiness of an individual or business, a statistically derived score is used taking into account several factors. It is used by lenders to assess if it is worth to grant a loan to an individual or business. A person’s credit history is pivotal for calculating it. The score can range from 300 to 850, the higher the score the better.

Credit Rating

It is the assessment of a person’s or businesses’ credit worthiness based on his credit history. It also takes into account one’s assets and liabilities.

Credit Control

It is a practice used by companies to control bad debts and increase the cash in. By this strategy, good credit is promoted among credit worthy individuals while loans are denied to borrowers with a bad credit history. It is important for the overall increase of cash flow and profitability of an organisation.

Credit Risk

Credit risk refers to the risk associated with lending credit to an individual or corporation when the borrower fails to repay the loan. The risk can result in loss of principal, interest and can disrupt the cash flow or increase the collection cost.

Line of Credit

It is the maximum loan a person can avail of. This limit is generally set by the bank for an individual after assessing his credit worthiness.

Credit Card

A credit card is a plastic card issued by financial institutions to borrow money at the point of sale to make purchases.

Credit Limit

The credit limit is the maximum amount of credit that a lender can give to the borrower. This term is also used to denote the maximum amount that can be borrowed on a credit card by a user. This limit is set keeping in view the credit history of a person.

We will concentrate on a few more definitions in our upcoming articles.