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GLOSSARY
Credit check
A credit check is the review of a loan applicant's debt payment history. Lenders perform this review to predict how the applicant will handle the proposed debt obligations.
Credit cliff
Credit cliff is a slang reference to the dangers of excessive debt leverage. In business, for example, a highly leveraged company may fall out of compliance with financial covenants and suffer a resulting interest rate increase. That increase could compound the company's financial problems, causing further covenant violations and further rate increases.
Credit default swap
A credit default swap is an arrangement that transfers a lender's risk of nonpayment to another party. The arrangement is made between a lender and a counterparty, based on a debt created between that lender and a third party. The lender makes payments to the counterparty, and in return, the counterparty agrees to guarantee the third party's debt. If the third party defaults, the counterparty pays off the lender and assumes the debt.
Credit derivative
A credit derivative is an agreement used to transfer credit risk from a lender to another party. Derivative contracts are financial assets, with the value of the asset being dependent on some outside factor. vIn the case of credit derivatives, the value is derived from the credit risk associated with the underlying debt, i.e., the risk that's being transferred to another party.
Credit enhancement
This method to reduce credit risk by requiring collateral, letters of credit, mortgage insurance, corporate guarantees, or other agreements to provide an entity with some assurance that it will be recompensed to some degree in the event of a financial loss.
Credit freeze
A credit freeze is a temporary blocking of an individual's or business's debt payment history as maintained by a credit agency. This is usually done for security purposes. The freeze blocks all access to the specified credit report and score, in order to prohibit the opening of new credit accounts under that identity.
Credit history
It is the documented and detailed statement of an individual's fully repaid debts. It helps the lender to ascertain the risk and creditworthiness of a potential borrower and whether he will be able to repay future debts in time.
Credit instrument
A credit instrument is a document that defines or substantiates a borrower's obligation to repay debt.
Credit life insurance
A type of life insurance that will help make payments on the loan if the consumer becomes disabled. This coverage is optional. The cost of the policy is sometimes rolled into the loan principal amount.
Credit limit
A credit limit is the maximum amount of debt available to a borrower under a credit card, charge card, or other type of revolving credit facility. The borrower may apply charges to the account only up to the approved credit limit.
Credit line
A credit line, or line of credit, is a debt facility that allows the borrower to take cash advances up to a predetermined amount. The term can also be used in reference to the maximum amount of credit available under a particular credit arrangement, as in, "Bob's credit line is $20,000."
Credit monitoring service
A credit monitoring service notifies individuals of certain changes to their credit file. This service helps individuals detect any signs of credit fraud or identity theft before their credit history is damaged.
Credit rating
Credit rating is a generic term for any system that ranks an individual's or business's ability to make debt payments as promised. In consumer credit, the most common credit rating is the FICO score, which is a numerical value lenders use to evaluate a borrower's creditworthiness.
Credit report
A documented statement of an individual's credit history and borrower's current credit standing. It is prepared by a credit bureau and used by lenders in determining the creditworthiness of the loan applicant.
Credit reporting agency
A credit reporting agency collects information on an individual's or business's debt payment history. Lenders use this information to evaluate a prospective borrower's creditworthiness.