Credit

Credit is a binding agreement between a lender, usually a financial institution, and a borrower, who can either be an individual or an entity. In a credit agreement, the borrower agrees to obtain funds as a loan and repay the lender over time with interest.

Broadly speaking, credit exists in two broad types: installment credit or revolving credit. Installment credit involves an account holder borrowing a fixed amount of money and repaying it on schedule with a fixed interest rate. Personal loans, mortgages and student loans fall under this category.

Meanwhile, revolving credit arrangements allow borrowers to get funds, repay them, and borrow again, up to a predetermined credit limit. Revolving credit facilities come with flexible payment options, but typically sport higher, floating interest rates. Credit cards and home equity lines of credit are examples of revolving credit.

Credit is also closely related to the creditworthiness of a borrower. This term refers to how likely a lender believes a borrower will repay or default on their debt obligations. Data gleaned from a borrower’s credit score and credit report can help lenders determine a borrower’s creditworthiness.

Borrowers who have a demonstrated track record of repaying their debt obligations in full are typically deemed to be more creditworthy than borrowers who have a history of financial delinquency. Creditworthy borrowers may enjoy lower interest rates and better loan terms than borrowers who pose credit risks to lenders. Those with strong credit may also have an easier time applying for new credit, securing new jobs, or renting an apartment.