Basic Credit Concepts

Anyone wishing to learn about the different types of credit available should first familiarise themselves with a few basic credit concepts. Getting to know them will allow a much better understanding of credit, and allow them to better judge whether they should apply for it or not.

Consumer Credit

The type of credit that the vast majority of borrowers will apply for is consumer credit. As opposed to credit intended for business and public organisations, consumer credit is aimed at individual consumers and couples. It is heavily regulated, with lenders having to meet certain standards when lending.

Debt

When consumers take out credit, they are classed as being in debt: debt is simply money owed by a person or organisation to another person or organisation. For consumers, it is essential to ensure they can make payments on all debt taken on. If they cannot then they should seek advice on debt management before the debt becomes too much to handle.

Bank Accounts

Bank accounts are the tool most people use to manage their finances. They allow customers to make payments and accept payments, save money and even borrow money: many bank accounts have optional overdrafts which allow account holders to borrow money in the short term. Some special bank accounts exist that are targeted at specific groups, such as business bank accounts, student accounts and basic bank accounts (aimed at those with a bad credit rating).

Interest

When customers take on credit or save money, interest is usually applied, either as a charge for borrowing as a reward for saving. It comes in two main forms – simple interest and compound interest – with most interest on consumer credit products being of the latter type. The interest measure most relevant to those taking out credit is the APR, or annual percentage rate, which gives an idea of the yearly interest charge for borrowing.

Borrower

A borrower is simply a person or organisation that borrows money from another person or organisation. Borrowers have certain responsibilities when taking on credit which they should ensure they adhere to, such as keeping up regular repayments. If they cannot do so, then free debt advice is often available that will help them with their debt management skills.

Lender

A lender, on the other hand, is a person or organisation that lends money to others, and just as borrowers have responsibilities, so do lenders. Their main responsibility is to agree to lend responsibly: they must not give credit to borrowers to suspect may not be repaid. In addition to this, lenders must extend reasonable help to any borrowers that get into trouble making repayments; their first recourse must be assistance rather than punitive action.

Credit Rating

A borrower’s credit rating is one of the main elements of any decision a lender might make to lend to them. This credit rating is based on the borrower’s credit history, and takes account of whether they have repaid past debt or not. If a borrower has a bad credit rating, certain actions can be taken to improve it which will in turn improve their chance s of obtaining credit.

Payment Protection Insurance

When consumers take out credit, they often have the option of taking out accompanying payment protection insurance. This insurance is intended to protect against unexpected periods when the borrower cannot earn from paid employment. Unfortunately, it has been mis-sold in recent years, with many of those that have taken it out having to make payment protection insurance claims.