Credit Products

What is credit?

Credit is a contract in which the borrower receives something of value immediately and pays for it later, usually with interest.

The word "credit market" refers to the market where governments and corporations issue debt to investors in the form of short-term commercial paper, investment-grade bonds, and junk bonds. 

The credit market, often referred to as the debt market, consists of debt offerings such as notes and securitized liabilities like CDOs, mortgage-backed securities, and credit default swaps (CDS).

The credit market is much larger than the equity market in terms of value and thus acts as the harbinger of the health of markets and the economy as a whole. The Government is the largest issuer of debt which it does through treasury bonds and such to raise capital.

Credits Products

1. Bonds: 

A bond is an asset regarded as a ‘debt instrument’ in which the bond buyer is lending the bond price to the bond issuer. The principal of the loan is known as the face/par value. Interests are paid till the maturity period of the bond and at the end, the face value is paid back to the holder by the issuer.

2. Collateralized Debt Obligation (CDO):

This is a complex structured finance product, a type of asset-backed security. A corporate entity is constructed to hold assets as collateral backing packages of cash flows that are sold to investors.

3. Credit Default Swaps (CDS):

A financial derivative known as a credit default swap (CDS) enables an investor to exchange or offset their credit risk with that of another investment. The lender purchases a CDS from another investor who agrees to pay them back if the borrower defaults to swap the default risk.

4. Credit Cards:

Credit cards allow individuals to borrow money up to a certain limit to make purchases or withdraw cash. They typically have variable interest rates and require a monthly minimum payment.

Credit Score:

A credit score is a numerical expression used to quantify a person's creditworthiness. It is based on a level examination of their credit files. It is based on an analysis of a person's credit history, including factors such as payment history, credit utilization, length of credit history, and types of credit used. The main component of a credit score is a credit report, which is normally obtained from credit agencies. 

Credit scores are used by lenders, like banks and credit card firms, to assess the risk involved in lending money to consumers and to reduce losses brought on by bad debt. Credit scores are used by lenders to decide who is eligible for a loan, the interest rate, and the credit limitations. Credit scores are also used by lenders to identify which clients are most likely to generate income.

Credit evaluation is not just used by banks. The same strategies are used by other businesses like mobile phone providers, insurers, landlords, and government agencies. Alternative data sources are being used by digital finance organizations, such as online lenders, to determine a borrower's creditworthiness.

The most commonly used credit score in the United States is the FICO score, which ranges from 300 to 850. A higher credit score generally indicates a lower risk of default and a better chance of being approved for loans or credit cards with favorable terms. A lower credit score may make it more difficult to obtain credit or result in higher interest rates.

Credit Health:

Credit health refers to the overall state of an individual's credit history and credit score. It considers factors such as payment history, credit utilization, length of credit history, and types of credit used. 

A good credit health indicates that an individual has a strong credit history and is likely to be approved for loans or credit cards with favorable terms, while poor credit health may make it difficult to obtain credit or result in higher interest rates.

There are several steps one can take to improve their credit score:

1. Pay your bills on time: Late payments can have a negative impact on your credit score.

2. Keep your credit utilization low: High credit utilization (using too much of your available credit) can lower your credit score. Aim to use less than 30% of your credit limit.

3. Keep old credit accounts open: A longer credit history can boost your credit score.

4. Limit new credit applications: Each time you apply for credit, it can harm your credit score. Try to avoid applying for new credit unless it's absolutely necessary.

5. Check your credit report for errors: Review your credit report regularly and dispute any errors you find.

6. Seek Professional Help: If you are looking to improve your credit, consider seeking help from a credit counselor or a financial advisor.

It's important to note that improving your credit health takes time and consistency, so it's important to be patient and stay committed to making changes.

Summary:

• A credit score is a numerical value that represents an individual's creditworthiness based on their credit history.

• Credit products such as credit cards, personal loans, mortgages, auto loans, home equity loans/lines of credit, and student loans allow individuals to borrow money or access credit.

• Credit history and credit score are used by lenders to determine an individual's creditworthiness and the terms of loans or credit products offered.

• Good credit health is indicated by a strong credit history and a high credit score, while poor credit health can make it difficult to obtain credit or result in higher interest rates.

• Improving credit health takes time and consistency and include paying bills on time, keeping credit utilization low, keeping old credit accounts open, limiting new credit applications, checking credit report for errors, and seeking professional help.

• Credit utilization, payment history, length of credit history, and types of credit used are some of the factors that affect credit scores.

                                                                                                                     By: Vedant Gupta | Linkedin