LECTURE – 02
UNDERSTANDING THE WORD “CREDIT”
xAs a financial term, used in such terms as credit card, it refers to the granting of a loan and the
creation of debt. Any movement of financial capital is normally quite dependent on credit, which in
turn is dependent on the reputation or creditworthiness of the entity which takes responsibility for
the funds. A similar usage is in commercial trade, where credit is used to refer to the approval for
delayed payments for goods purchased. Credit is denominated by a unit of account. Unlike money
(strict definition) credit can not itself act as a unit of account.
xA privilege granted for the purpose of extending time to make payment on a debt
xBorrowed money or other finance (e.g. Hire purchase) to be paid back under an arrangement with a
lender.
The money a lender extends to a buyer for a commitment to repay the loan within a certain time frame.
You are granted credit when an organization or individual makes a sum available for you to borrow.
There are two main types of credit.
1. Home loans, or mortgages, and personal or shop loans are linked to a specific item or items –
for example, a new kitchen, or a house
2. Revolving credit on payment cards can give you access to a fixed amount of money that you
can spend as you wish, in a wide range of retailers and other outlets
Repayment
Loans are normally repaid in regular installments over an agreed period of time. Mortgages, or home
loans, can be repaid in variable installments but most personal loans specify fixed repayments of
approximately equal amounts.
If you want to make another major purchase when you have finished paying off one loan, you need to
negotiate a new loan. Revolving credit means that you always have access to the amount of your line of
credit that remains unspent. And every time you pay off some of the outstanding amount, that
proportion of your credit limit becomes available for you to spend again.
So if you have a credit limit of Rs 1,000, spend Rs 300 and repay Rs 100, you have Rs 800 available to
spend. Whatever type of loan you choose, be certain to make your repayments on time, or you can face
financial penalties
Interest
In order to cover the lending risk and to make a profit on their money, lenders generally charge interest
on loans and revolving credit. You must remember this when you are calculating your repayments.
For example, if you borrow Rs 100 and interest is payable at an annual rate of ten per cent, the total
cost is Rs 110. This is known as simple interest. It is rarely charged on borrowings. Compound interest
is more common. It means that interest is charged on the interest at regular intervals.
For example – if you owe Rs 100 and are charged ten per cent compound interest each year, at the end
of year one you will owe Rs 110. In year two, the lender will charge ten per cent of this sum and add it
to the outstanding amount, so you will owe Rs 121, and so on.
Interest may be compounded after any period – a day, a week, a month and so on. With fixed
repayment loans, the amount of interest is worked out in advance and added into the repayments. There
is often a penalty if you want to repay the outstanding amount earlier than agreed.
With revolving credit, you can repay as much or as little as you want, at any point. You can often avoid
paying any interest at all if you repay the total amount you have borrowed on the date when the first
repayment is due.
Credit Score
xA credit score is a numerical expression based on a statistical analysis of a person's credit files,
to represent the creditworthiness of that person, which is the perceived likelihood that the
person will pay debts in a timely manner. A credit score is primarily based on credit report
information typically sourced from credit bureaus / credit reference agencies
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