What Is a Credit Agreement?

A credit agreement is a legally binding agreement entered into between a lender and a borrower. It outlines all of the terms of the borrowing relationship, such as the interest rate, costs of originating the loan, and other borrower and lender rights and obligations. Virtually all types of loans have credit agreements, including revolving credit arrangements.

Definition and Examples of Credit Agreements

Credit agreements are written documents that a lender creates and that you agree to accept when you take out a loan or open a line of credit. They govern the relationship between the lender and the borrower. They establish all of the terms of the borrowing relationship, including how much funding is available and when and how you are obligated to make repayment to the lender.

For example, a credit card company's credit agreement would be provided when you sign up for a credit card. The agreement would specify the terms of the credit card and the relationship between you and the creditor, such as:

• The annual percentage rate (APR) for purchases, balance transfers, direct deposits, and cash advances
• Information on how that interest is calculated and what balances are subject to interest
• When a penalty APR applies and what the amount is
• The minimum interest charge
• Any account fees or transaction fees such as a balance transfer fee, ATM cash advance fee, or check cash advance
• Penalty fees
• Payment due date and when interest begins to accrue
• How the card issuer calculates balances outstanding
• Rights of the creditor to amend the agreement
• The manner by which you can obtain funding, such as purchases, balance transfers, or cash advances, as well as a definition of each type of credit extended
• Details about transactions made in foreign currencies
• Information and disclosures about any promotional rates
• Information about how you should make payments when payments are due, and in what amount

If a lender wants to change the terms of the credit agreement, they generally must provide you with notice and the chance to opt out of the change. Opting out could mean you must close your account, such as if it is a revolving account.

Note

You should always read the fine print of credit agreements to make sure you understand the costs of borrowing and the responsibilities you are taking on.

How Credit Agreements Work

Lenders provide credit agreements to borrowers who are interested in opening a credit card or applying for various types of loans, such as a home equity loan. You have the opportunity to review the credit agreement and determine whether you want to move forward with borrowing under the lender's terms.

Credit agreements establish the rights and responsibilities of both lenders and borrowers. For example, if a creditor wants to pursue a claim against you when you are declaring bankruptcy, the creditor may be asked to provide proof of their claim in the form of a credit agreement.

Note

Credit agreements are subject to certain federal and state regulations. For example, credit card companies that wish to post credit agreements online must submit copies of their agreements quarterly to the Consumer Financial Protection Bureau (CFPB).

Types of Credit Agreements

Revolving credit agreements allow you to borrow up to a set amount as determined by your credit line. You are only billed for the amount of money you’ve currently accessed, along with interest.

Home equity lines of credit (HELOC) allow you to borrow up to a set amount with the line of credit guaranteed by the value of your home.

Term loan credit agreements allow you to take a loan for a fixed amount on a set repayment schedule. Mortgage loans and personal loans are term loans because they have a set term for repayment. These are also called installment loans.

Key Takeaways

• Credit agreements are written documents that a lender creates and that you agree to accept when you take out a loan or open a line of credit.
• They establish the rights and obligations of lenders and borrowers.
• Credit agreements are required for many types of loans or lines of credit, including credit cards, personal loans, mortgage loans, and home equity loans.
• Lenders can use credit agreements to prove you owe a debt.
• Credit agreements detail when and how interest is charged, when and how you must make payments, and more.
• If lenders want to modify a credit card agreement, you must be given the chance to opt out.