Credit is an agreement you have with a lender to obtain goods or services that you pay for at a later date under agreed upon terms. The record of your credit amount, utilisation and duration is continuously recorded to maintain your credit history.
Types of Credit
- Installment Credit: This involves the lender extending the amount upfront and the lendee agreeing to payback the amount in regular installments over a fixed period of time. Eg: Business loans, car loans, home loans. etc.
- Revolving Credit: Revolving credit allows customers to borrow a line of credit when they need it. You can borrow up to a certain limit, after the repayment of which you can borrow again and repeat the process again. Many of these credit lines are interest free if you pay within the stipulated time. Late or minimum required transactions can lead to high interests. Eg: Credit Cards, lines of credit.
The credit report tells the entire account of your financial activities and provided to the creditors to decide whether to approve the credit or not.
Credit Bureaus: These agencies collect and maintain individual credit reports to summarise for the lenders. The information is collected from lending companies, data collection agencies, money collection agencies and various others. There are 4 credit bureaus in India – TransUnion CIBIL, Equifax, Experian and CRIF Highmark.
Credit Score: The financial data collected by bureaus of individuals is score on a scale of 300 to 800 which denotes good credit health. When a person has a good credit score, lending institutions are willing to give loans without hassle and at cheaper rates.
- Loans: A loan is a commitment that you (the borrower) will receive money from a lender, and you will pay back the total borrowed, with added interest, over a defined time period. There are two types of loans: Secured(with a collateral) and Unsecured(without a collateral).
- Credit card: A credit card is a type of unsecured borrowing under which a bank or NBFC agrees to offer you a predefined credit limit. You can make transactions up to the said limit and pay it back on the due date or convert the transaction into EMI and pay over a period of a few months. It is a revolving credit.
- Line of Credit(LOC): It works somewhere between a loan and a card. The borrower gets a pre-approved credit from the bank and he/she can withdraw money as and when required and keep the rest of money with the bank. Interest is charged only on the withdrawn money. For instance, if you have a credit line of ₹1 lakh and withdraw only ₹50,000, you pay interest on only ₹50,000. And once you pay back, you have a ₹1 lakh limit available once again.
- Buy Now Pay Later(BNPL): BNPL are said to be tech-enabled credit/loans which are provided to the borrowers at the time of sale as a payment option. Unlike credit cards, the decision is on spot depending on the sale amount.