8 most common credit terms.

The 8 most common credit terms may seem confusing to you at first. Professional words, terms and phrases can sometimes be very confusing and terrifying. When trying to understand how to improve and maintain your credit score, you should first gain a better understanding of the important credit terms. Credit Health explains the 8 most common credit terms here.

  • Credit Agreement: After having your loan approved, you can expect to receive a credit agreement, which is the contract outlining the terms of the loan itself. This contract outlines (1) the amount of money that is being lent, (2) the interest rate per period or in total, (3) an initiation fee if applicable, and (4) instalments for paying off your loan in full. If you agree to these terms when you sign this contract, then you are accepting these terms.
  • Eligibility: Loan companies and banks will take a look at certain factors before extending you a loan, such as your credit score. This means they’ll ask themselves: “Can this person pay back the loan as the agreement outlines?”
  • Quote: Before showing you the credit or loan agreement, companies will usually show you a quote. A quote outlines the same terms as the credit and loan agreements and shows you information with much more detail.
  • Credit Score: Your credit score helps to tell a loan company whether you are high-risk or low – and, generally, what you do with your money. Things like early or late repayments and your general level of financial responsibility will affect your credit score and how financial institutions view you as a risk.
  • Credit Check: When someone looks up information from a credit bureau in regards to a credit score, this is called a credit check. It outlines your credit score – and says more about your financial standing. Companies other than loan providers (such as estate agents) also make use of credit checks, but have to ask your permission to do it.
  • Instalment: To pay in instalments refers to the way in which one pays back a loan. There are two ways in which one can do this: you can either make single payments over multiple months like when splitting the payments up into 12 or 24 instalments, or you can pay it all off at once like when taking out an instant loan.
  • Initiation Fee: An initiation fee is a lump sum that you have to pay in order to have the loan process take place. In most cases, the initiation fee goes towards paying for the credit check and loan approval process, but in some cases it doesn't go towards any fees at all. It's very important to make sure that when you provide your card information or other banking information, you really do see what will be charged. There are loan providers out there who will claim that an up front fee isn't a real fee!
  • Principal Debt: The principal amount is the loan amount you originally requested. Let's say you apply for and receive a loan of R2, 000. Your initial debt is R2, 000. Anything you pay over this amount will go towards paying off interest, once added costs like initiation fees are taken care of.

Contract and legal jargon can be downright alienating – and not just because of the subject matter! If it seems as if the language is intentionally designed to mislead, that's because it probably is, but that’s why you now know the 8 most common credit terms. Long words and confusing terms tend to cloud up the simple concepts – so if you don't know what a certain term means, we totally understand.

A guide to understanding credit and credit scores

What is credit?

Credit is defined as a contractual agreement where a borrower receives a sum of money or something of value and repays the lender at a later date, usually with interest.

What is a credit agreement?

A credit agreement is a legally binding agreement between a lender and a borrower. A credit agreement outlines all of the terms of the agreement, including the loan/credit amount, the interest rate and other borrower and lender rights and obligations.

What is a credit score?

A credit score is a three-digit number, typically between 300 and 850. A credit score is used to represent your credit risk (the likelihood you will pay your bills on time). Credit scores are calculated using information in your credit report – like how consistently you've paid your bills over the years, how much debt you have, as well as other factors. A higher credit score means that you have demonstrated responsible borrowing behaviour in the past.

Lenders use this information to decide whether to offer you a loan for which you're applying or decide if they'll agree to terms of an existing loan with you.

How to check your credit score

You can request your credit report online from Credit Health, or get 1 credit report for free online from any of the major credit bureaus. Collection agencies are registered with one or more of these bureaus which means that all payment details, defaults, judgements, and transactions, are recorded on your file.

Who checks your credit score?

Companies that may check your credit score include:

  • Banks
  • Creditors
  • Lenders
  • Potential employers
  • Insurance companies
  • Debt-collection companies

What affects your credit score?

Your credit score is determined by a number of factors. These factors can influence your credit score in both a positive and a negative way. It’s important to understand what affects your credit score to ensure that you keep it as healthy as possible.

Some of the factors that influence your credit score include:

  • Your credit limit - If you have a higher credit limit this indicates to lenders that you are low risk as a borrower. A lower credit limit, however, may be given if you are considered to be a higher risk borrower. A lower credit limit is, however, usually given to people who have little or no credit history.
  • Credit age - Credit age is important as it tells lenders you are capable of managing your credit, this can help improve your credit score.
  • Payment history - Payment history is important for your credit score. Good payment history will improve your credit score and show lenders that you are committed to make payments on time. A poor payment history, however, can negatively affect your score. Any payment defaults will stay on your credit file for 5 years.
  • New accounts - Proceeding to try and open a number of new accounts in a short space of time may show that you are desperate for credit and can negatively affect your credit score. It’s best to try and only open one new account every 6 months or so.
  • Credit utilisation - If you have reached your maximum credit limit on all of your accounts this will negatively affect your credit score and show lenders that you are heavily reliant on credit. A lower utilisation will show lenders that you are able to manage your finances and are not heavily reliant on credit.

Credit terms are important. Your credit score is one of the most important concepts to understand when it comes to credit. We hope this article has helped you understand the various credit terms. If you have any other questions about your credit score or any other credit term, please feel free to contact Credit Health.

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