Credit Explained

An unbiased, independent guide to all types of credit.

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Basic Credit Concepts
Anyone wishing to learn about the different types of credit available should fir
st 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 judg
e whether they should apply for it or not.
Consumer Credit
The type of credit that the vast majority of borrowers will apply for is consume
r credit. As opposed to credit intended for business and public organisations, c
onsumer credit is aimed at individual consumers and couples. It is heavily regul
ated, with lenders having to meet certain standards when lending.
Debt
When consumers take out credit, they are classed as being in debt: debt is simpl
y 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 bor
row 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 b
ank 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
si
mple interest and compound interest with most interest on consumer credit produc
ts 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 yea
rly interest charge for borrowing.
Borrower
A borrower is simply a person or organisation that borrows money from another pe
rson or organisation. Borrowers have certain responsibilities when taking on cre
dit which they should ensure they adhere to, such as keeping up regular repaymen
ts. If they cannot do so, then free debt advice is often available that will hel
p them with their debt management skills.
Lender
A lender, on the other hand, is a person or organisation that lends money to oth
ers, and just as borrowers have responsibilities, so do lenders. Their main resp
onsibility is to agree to lend responsibly: they must not give credit to borrowe
rs to suspect may not be repaid. In addition to this, lenders must extend reason
able 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 mi
ght make to lend to them. This credit rating is based on the borrower s credit his
tory, and takes account of whether they have repaid past debt or not. If a borro
wer has a bad credit rating, certain actions can be taken to improve it which wi
ll 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 accompa
nying payment protection insurance. This insurance is intended to protect agains
t unexpected periods when the borrower cannot earn from paid employment. Unfortu
nately, it has been mis-sold in recent years, with many of those that have taken
it out having to make payment protection insurance claims.
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Basic Credit Concepts (8)
Consumer Credit
Debt
Bank Accounts
Interest
Borrower
Lender
Credit Rating
Payment Protection Insurance
Lenders (10)
Loans (16)
Credit Cards (11)
Mortgages (24)
Overdrafts (7)
Debt Management (7)
This website is for informational purposes only, and should not be taken as advi
ce on how to obtain credit or manage it. It is essential that anyone considering
taking out credit should obtain professional advice before doing so, as mishand
ling credit can lead to repossession of property, including a person's home, or
worse.