In order to understand what a credit application is, we must first become acquainted with the notion of credit – as a credit application is nothing else but a formal request addressed by an individual or a business to a lender, asking the lender to extend resources (in the form of credit) to the applicant. Credit is essentially a form of borrowing, as it refers to the provision of resources by one party (the lender or creditor) to another (the borrower or debtor). The borrower does not reimburse the lender immediately after the credit is granted, but rather repays the incurred debt at a later date, either in full or in installments, as agreed beforehand. A credit application is thus a demand for credit extended either by an individual or a business (a commercial credit application) to a lender, typically a bank or other type of financial services provider
In this modern age, the credit has become a vital part of both individuals’ and organizations’ financial life. The credit applications are thus among the most frequently filed documents nowadays and constitute official requests addressed by consumers and businesses to lenders asking to be granted either money, goods or services which are provided in lieu of actual payment. Banks will provide credit to borrowers in exchange for a number of additional charges (such as interest and arrangement fees). Many companies too will offer credit to their customers as under the terms of purchase agreements. Up until a year or so ago, due to the widespread availability of credit, an entity’s ability to access and repay credit was essential for its success – or lack thereof. The current financial crisis – also referred to, in a very self-explanatory fashion, as “the credit crisis” – has altered the overall perception on consumer and business credit as well as the circumstances under which lenders agree to extend credit to borrowers.
The credit application
Overall, we can distinguish between consumer credit applications and commercial credit applications based on whether the requesting entity is an individual borrower or a company. Among the various forms of consumer credit, credit cards are extremely popular, along with mortgages, personal and retail loans. In this context, the credit card applications can be deemed the most frequent types of consumer credit applications, due to the variety of credit card issuers and branding options available and the large volume of credit card solicitations and offers sent to consumers mainly via traditional mail. With the advent of the internet, would-be credit cardholders can fill in their credit card applications online and receive their cards in the mail within a relatively short time span. There are even such things as preapproved credit card applications - promotional which credit card companies mail to a list of consumers whose credit reports they check beforehand in order to ensure they meet the required qualifications with regard to income, credit history and credit scores.
A credit card is essentially a payment instrument which is part of a large and complex payment system. A credit card application – if successful – will provide the borrower (credit cardholder) with a card, which entitles him or her to purchase goods and services using a line of credit granted by the issuer, from which the borrower can take away money and use it for payment to a merchant or as a cash advance. The credit card applications are relatively easy to fill in: a sample credit application or a model of a credit card application form can be easily obtained online; however, the applicant must pay particular attention to the terms to which he or she agrees when signing up for such a card. Under the terms of the Fair Credit and Charge Card Disclosure Act, which was passed over 20 years ago (in 1988 to be more precise), credit card issuers have the legal obligation to disclose, in a table format or directly, the variations in the rates they apply to every credit card they offer to the public. They must also disclose any minimum finance charges, transaction fees and the way in which all additional charges are computed.
The credit application
The main advantage of credit cards is the fact that they offer a high level of convenience by providing quick access to short-term loans for consumers. Also, they virtually eliminate the need for consumers to carry large amounts of cash with them, as the vast majority of retail locations offer credit card payment facilities. Unless handled carefully, however, credit card debt can pile up and become extremely burdensome, particularly for cardholders who abuse their available credit and fail to make timely payments, thus carrying increasingly large balances on their cards. Credit cards often come with default rates of 20 to 30 percent in case one or more payments are missed, which can lead to a snowball effect. Also, it has by now become common knowledge that the majority of card holder agreements allow issuers to arbitrarily raise interest rates for any reason they see fit without having to provide justification.
One aspect regarding the credit card applications – particularly the preapproved ones – fail to remind consumers is that any granted credit comes with costs, in addition to the amount borrowed which has to be restituted in full. The borrower has to pay interest, arrangement fees and any other mandatory costs, which are solicited by the lender as part of the credit agreement. Other costs are optional, with the borrower being able to choose whether or not they are included within the agreement. Yet another aspect that is rarely mentioned during advertising campaigns is that consumers may see their credit card application denied, for a variety of reasons. This happens even with allegedly preapproved credit card applications, mainly because the credit card company which sent the application didn’t review individual credit scores and credit histories accurately enough. Far from being simply the utmost expression of modern convenience, a credit card is a responsibility, which – unless it is handled carefully – may lead to significant financial troubles for its owner. The same holds true for credit in general – and the current (and very aptly named) credit crunch is perhaps the best possible testimony as to what happens when credit is granted too easily and used too freely.
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