Creditors Lenders and Credit Issuers

Creditors Lenders and Credit Issuers have the deciding role when building credit

Creditors Lenders and Credit Issuers are in the business of collecting debt, extending credit and earning money from issuing credit lines.

Good credit depends on useful information. To have a good credit score, one must learn about what specific decision and action might affect it.

Having good confidence means that you have demonstrated that you can handle credit responsibly – that you have managed your credit obligations and paid off your debt balances on time.

Creditors, lenders and card issuers play a big part on your credit score because they are the one who decides if you are approved on your application or not.

To build good credit, you need to get first credit. As simple as that but there are difficulties when having a credit. You need to be extra careful with your actions because it might affect your credit score that easy.

Most of you might be confused about what role does creditor, lenders and card issuers play. They are similar in some ways, and they also have differences in some cases. Here, I will show you what their definition is and what roles are they playing.

Difference Between Creditors and Lenders

A creditor may be a person, bank or supplier that has provided credit to a company. A company owes money to its creditors. The amount of money owed to creditors are reported to a company’s balance sheet and categorized as liabilities.

If a creditor required the company to sign a promissory note for the amount owed, the company would record and report the amount as Notes Payable.

If a creditor is a vendor or supplier that did not require the company to sign a promissory note, the company will likely report the amounts owed as Accounts Payable.

Other examples of creditors include the company’s employees (who are owed wages and bonuses), governments (who are owed taxes), and customers (who made deposits or other prepayments).

Some creditors are known as secured creditors because they have a lien or other legal claim to the company’s (debtor’s)assets. Other creditors are often unsecured creditors since they do not have a lien or legal right to specific assets of the company.

It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property and service.

The second party is frequently called a debtor or borrower. The first party is the creditor, which is the lender of property, service or money. A lender is a person or entity which loans money to another person or entity.

A creditor is a person or entity to whom the borrower must repay the money. Sometimes, the lender and the creditor are the same entity, other times they are different entities.

For example, if you get a loan from a bank and then owe the money to the bank, the bank is your creditor. But the bank can sell your debt to another entity, so now, while you borrowed from the bank, you owe the money to the new buyer of your loan who is now the creditor.

If you buy a home and obtain a mortgage to help pay for the price of the purchase, your mortgage loan is funded by a lender. Sometimes lenders keep these mortgages on their books, but more often the loan is “sold” by the lender to a professional investor entity that is now the creditor to whom you make the payments.

Mortgage creditors often employ payment processing companies that are known as “servicers.” Servicers receive the payments you make, deposit the payments with the banks, and record the payment for your mortgage account on the books of the creditor.

Servicers are sometimes also employed by auto loan creditors. Servicers handle the payments and record keeping for auto loan portfolios that are owned by private investor groups, as well as portfolios owned by auto finance companies or large banks.

There are generally two types of creditors: personal and real. Personal creditors are people who loan money to friends or family. 

Real creditors are financial entities who require borrowers to sign legal contracts that grant the creditor some sort of collateral — e.g., car, house, jewelry — if the borrower fails to repay the loan. Let’s look at a scenario with a real creditor, XYZ Bank, to whom you go to for a loan.

If you are approved, and they lend you money, XYZ Bank becomes your creditor. Individuals and companies can have several creditors at any given time, for many different types of debt.

Additional examples of creditors who extend credit lines of money or services include utility companies, health clubs, phone companies, and credit card issuers.

Not all creditors are considered equal. Some creditors are considered superior to others (senior), while others are subordinate.

For example, if Company XYZ issues bonds, the bondholders become creditors senior to Company XYZ’s shareholders. And should Company XYZ then go bankrupt, the senior bondholders are entitled to repayment before the shareholders are.

You are a secured creditor if you have the right to repossess and sell your debtor’s assets if they fall behind in their payments to you – e.g., if you have a mortgage over their house or a hire purchase agreement over their car.

An unsecured creditor is someone who is owed money by a person or a company but does not have the right to repossess or sell any of their assets if they default on the payments.

Most creditors are doing the damage without even realizing and knowing it. Creditworthiness plays a significant role in having your applications approved.

The name sounds pretty self-explanatory—creditors are describing how worthy you are of credit. More specifically, the term creditworthiness is used to describe the likelihood that you’ll default on a credit obligation.

Your creditworthiness is based on how you’ve handled credit and debt obligations up to this point.

Creditors can tell how well you’ve managed your previous credit obligations by looking at your credit report, which is a record of the activity on your credit accounts.

Credit reports can be dozens, sometimes even hundreds, of pages long and every time, consuming for a person to review.

Rather than review your complete credit report to determine your creditworthiness, creditors and lenders use credit scores, which are an objective measure of your creditworthiness based on your credit report information.

A credit score is a three-digit number, often ranging between 300 and 850. The higher your credit score, the more “creditworthy” you are. That means you’re more likely to repay your debt obligations on time.

The more creditworthy you are, the more creditors and lenders are willing to approve your applications and give you a lower interest rate. How often you pay your bills on time is the most significant factor that affects your creditworthiness.

Recent late payments and other delinquencies can make you less creditworthy and, as a result, make it harder to get approved for new credit cards and loans.

Your creditworthiness is also affected by the amount of debt you’re carrying. Having high credit card balances, for example, can make it more difficult to have your applications approved.

The best habit for your creditworthiness is to keep your credit card balances below 30 percent of the credit limit and pay down your loan balances.

Minimize your new applications for credit, only applying for new items as you need to.

When you apply for a loan or other type of credit, such as a credit card, the lender has to decide whether or not to lend to you. Creditors use different things to help them decide whether or not you are a good risk.

Different lenders use different systems for working out your score. They won’t tell you what your score is but if you ask them, they must tell you which credit reference agency they used to get the information about you.

You can then check whether the data they used is right. Because creditors have different systems to work out credit scores, even if you’re refused by one creditor, you might not be denied by others.

You may be able to improve your credit score by correcting anything that is wrong on your credit reference file.

A lender is an individual, a public or private group, or a financial institution that makes funds available to another with the expectation that the funds will be repaid.

Repayment will include the payment of any interest or fees. Repayment may occur in increments (as in monthly mortgage payment) or as a lump sum.

Lenders may provide funds for a variety of reasons, such as a mortgage, automobile loan or small business loan. The terms of the loan specify how the loan is to be satisfied, the period of the loan, and the consequences of default.

One of the largest loans consumers take out are home mortgages. Qualifying for a loan depends mainly on the borrower’s credit history.

The lender examines the borrower’s credit report, which details the names of other lenders extending credit, what types of credit are extended, the borrower’s repayment history and more.

The report helps the lender determine whether the borrower is easy managing payments based on current employment and income. The lender may also evaluate the borrower’s debt-to-income (DTI) ratio comparing current and new debt to before-tax income to determine the borrower’s ability to pay.

Lenders may also use the Fair Isaac Corporation (FICO) score in the borrower’s credit report to assess creditworthiness and help make a lending decision.

The lender evaluates a borrower’s available capital. Capital includes savings, investments and other assets which could be used to repay the loan if household income is insufficient.

This is helpful in case of a job loss or a different financial challenge. The lender may ask what the borrower plans to do with the loan, such as use it to purchase a vehicle or other property. Other factors may also be considered, such as environmental or economic conditions.

The following are the lenders’ responsibilities that they need to follow and apply all the time. Lenders must:

  • Make reasonable inquiries before entering into a loan (or taking a guarantee) to be satisfied that:
    •  The credit provided will meet the borrower’s needs and objectives.
    • The borrower or guarantor will be able to make the payments under the loan or comply with the guarantee, without suffering substantial hardship.
    • Help borrowers and guarantors to make informed decisions.
  •  Help borrowers decide whether to enter into the agreement, agree to variations or any later decisions and to be reasonably aware of the contract’s effect by making sure:
    • advertising is not likely to be misleading, deceptive or confusing to borrowers.
    • the contract’s terms are expressed in plain language in a clear, concise and intelligible way.
    •  Information is not presented in a way that is likely to be, misleading, deceptive or confusing
  • Act reasonably and ethically:
    • when breaches of the loan occur or when other problems arise.
    • when a borrower suffers unforeseen hardship.
  • During repossession including:
    • taking all reasonable steps to ensure goods and property are not damaged.
    • adequately storing and protecting repossessed goods.
    • Not exercising the right to enter premises unreasonably.
  •  Not use oppression in dealings with borrowers:
    • to ensure contracts are not oppressive.
    • their lending powers are not exercised in an oppressive manner.
    • Borrowers are not induced into contracts by oppressive means.
  • Comply with all of their other legal obligations to borrowers. This includes:
    • following the rules about disclosure, credit fees, unforeseen hardship applications, and credit repossession in the Credit Contracts and Consumer Finance Act.
    • not making false or misleading representations or including unfair contract terms as required by the Fair Trading Act.
    • carrying out their services using reasonable care and skill.

Lenders are businesses or financial institutions that lend money, with the expectation that it will be paid back.

The lender is paid interest on the loan as a cost of the loan. The higher the risk of not being paid back, the higher the interest rate.

Lending to a business (particularly to a new startup business) is risky, which is why lenders charge higher interest rates and often they don’t give small business loans.

Lenders do not participate in your business in the same way as shareholders in a corporation or owners/partners in other business forms.

In other words, a lender has no ownership in your business. Lenders have a different kind of risk from business owners/shareholders.

Lenders come before owners concerning payments if the company can’t pay its bills or goes bankrupt.

That means that you must pay lenders back before you and other owners receive any money in a bankruptcy.

The type of lender you will need for a business loan depends on several factors:

• Amount of loan: The amount of money you want to borrow influences the type of lender. For more massive loans, you may need a combination of types of commercial loans.

• Assets pledged: If you have business assets you can pledge as collateral for the loan, you can get better terms than if your loan is unsecured.

• Type of assets: A mortgage is typically for land and building, while an equipment loan is for financing capital expenditures like equipment.

• Startup or expansion: A startup loan generally is much more difficult to get than a loan for development of an existing business. For a startup, you may have to look at some of the more untraditional types of lenders described below.

• A term of the loan: How long do you need the money? If you need a short-term loan for a business startup, you will be looking for a different lender than for a long-term loan for land and building.

The most common lenders are banks, credit unions, and other financial institutions.

More recently, the term lenders have been expended to refer to less traditional sources of funds for small business loans, including:

• Peer-to-peer lenders: borrowing from individuals, through online organizations like Lenders Club.

• Crowdfunding: through organizations like Kickstarter, and others. The good thing about these lenders is that they don’t require interest payments!

• Borrowing from family and friends: Some organizations help sort out the tricky financial and personal issues involved with these transactions. If you are considering a loan from someone you know, be sure to create a loan agreement. These agreements are sometimes called private party loans.

• Borrowing from yourself: You can also loan money to your business as an alternative to investing in it, but make sure you have a written contract that explicitly spells out your role as a lender, with regular payments and consequences if the business defaults.

As you look for a lender, consider the type of loan you need, whether you have any assets to pledge against the loan, and the other factors that will determine your ability to get a business loan and the terms of that loan.

Credit Issuers

A credit card issuer is a bank or credit union which offers credit cards. The credit card issuer extends a credit limit to cardholders who qualify for the credit card.

When consumers make credit card purchases, the credit card issuer is responsible for sending payments to merchants for purchases made with credit cards from that bank.

Credit card issuers are a type of lender. Card issuers accept a certain amount of risk when they approve credit card applicants and extend a credit limit.

Credit card issuers evaluate each application and set the terms for the credit cards based on the applicant’s credit history. Some cards may have rewards or other incentives to entice consumers to sign up for credit cards.

Credit card issuers have to follow government regulations to issue credit cards. They must also work with payment processing networks who help facilitate credit card transactions.

Lots of sensitive cardholder information is transferred in the application process, and credit card issuers must have the infrastructure to handle the number of sales and keep the data safe from hackers.

Wondering who is your credit card issuer? Look at the front of your credit card. Usually, the credit card issuer is the bank whose name is printed at the top of the card.

With private label credit cards, the name of the credit card issuer is printed on the back of the credit card in small print.

It’s important to know your credit card issuer, so you know who to call if you’re having trouble with your card, spot fraud on your account, or need to ask questions about your account.

Credit card issuers can’t issue credit cards all by themselves, they need the help of payment processing networks like Visa and MasterCard.

However, American Express and Discover act as both the credit card issuers and the payment processing network for their credit cards.

The payment processing networks authorize and processing transactions, set the terms of transactions, and help facilitate payments between merchants, credit card issuers, and cardholders.

What Does Underwriter Do?

An underwriter is any party that evaluates and assumes another party’s risk for a fee, such as a commission, premium, spread or interest. Underwriters operate in many aspects of the financial world, including the mortgage industry, insurance industry, equity markets, and common types of debt securities.

Underwriters can play a variety of specific roles, depending on the context of a financial situation. Generally, they are considered to be the risk experts of the financial world. Investors rely on them to determine if a business risk is worth taking.

The most common type of underwriter is a mortgage loan underwriter. Mortgage loans are approved based on a combination of an applicant’s income, credit history, debt ratios, and overall savings.

Mortgage loan underwriters ensure that a loan applicant meets all of these requirements, and they subsequently approve or deny a loan. Underwriters also review a property’s appraisal to ensure that it’s accurate and that the home is roughly worth the purchase price and loan amount.

Mortgage loan underwriters have final approval for all mortgage loans. Loans that aren’t approved can go through an appeal process, but the decision requires overwhelming evidence to be overturned.

Insurance underwriters, much like mortgage underwriters, review applications for coverage and accept or reject an applicant based on risk analysis.

Insurance brokers and other entities submit insurance applications on behalf of clients, and insurance underwriters review the application and decide whether or not to offer insurance coverage.

Additionally, insurance underwriters advise on risk management issues, determine available coverage for specific individuals, and review existing clients for continued coverage analysis.

In equity markets, underwriters administer the public issuance and distribution of securities from a corporation or other issuing body. Perhaps the most prominent role of an equity underwriter is in the IPO process.

An IPO is a process of selling shares of a previously private company on a public stock exchange for the first time.

IPO underwriters are financial specialists, who work closely with the issuing body to determine the initial offering price of the securities, buys them from the issuer, and sells them to investors via the underwriter’s distribution network.

Underwriters purchase debt securities, such as government bonds, corporate bonds, municipal bonds or preferred stock, from the issuing body (usually a company or government agency) to resell them for a profit.

This profit is known as the “underwriting spread.” An underwriter may resell debt securities either directly to the marketplace or to dealers, who will sell them to other buyers.

When the issuance of debt security requires more than one underwriter, the resulting group of underwriters is known as an underwriter syndicate.

The main thing that can go wrong in underwriting has to do with the home appraisal that the lender ordered: Either the assessment of value resulted in a low estimate or the underwriter called for a review by another appraiser.

In some cases, a hitch means that the property might not qualify for the mortgage at all. The home could be deemed uninhabitable or have specific structures that are dangerous.

Less drastically, the appraiser can’t find a permit for a remodel, has seen that the house has had non-permitted improvements, or thinks extensive repairs are required to bring the home up to code.

If it’s not the property, the underwriter’s problem lies with the loan applicant. Since lenders want assurance of timely repayments, they zero in on your reliability to earn money.

Do long, unexplained gaps exist in your employment history? Have you changed jobs within the past two years and taken on a completely different line of work? Are you a temporary employee?

Is the company likely to lay off staffers soon? Mortgage applicants often assume that because they are current on all revolving debt payments, they have excellent credit and a high credit score.

Keep in mind the difference between lenders, creditors, card issuers and underwriters so you will not be confused about it. They are the ones that mostly affect your credit score because the final decision comes from them.