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A credit agreement is a contract between a lender and a borrower that outlines the terms of an installment loan such as a mortgage or car loan, or a revolving account such as a credit card. It describes your responsibilities as the account holder; explains interest charges, fees and payment due dates; spells out procedures for resolving disputes related to the account; and may establish a variety of other terms that govern your relationship with the lender.
What Is a Credit Agreement?
Borrowing money or opening a new credit card account requires accepting a set of terms and conditions that govern account use and repayment of any money that's advanced to you. These terms and conditions are spelled out in a contract known as a credit agreement.
Credit agreements can be lengthy documents with many sections, and specific contents will vary based on the type of account and lender policies.
Typical contents of a credit agreement include:
- Interest rate on the loan or revolving account, including:
- How often interest compounds on the outstanding loan balance, such as daily, monthly or annually.
- If the interest rate is variable, how the rate is determined (typically by adding a fixed number of percentage points to a published market index) and how often the rate resets (such as annually, semiannually or monthly).
- In the case of credit cards that offer balance transfers or cash advances, the fees and interest rates applicable to those transactions.
- In the case of installment loans, the number of payments required to pay back the loan in full.
- When payments are due each month.
- Penalties that apply to late payments, including any grace periods during which payments may be accepted without interest charges or penalties.
- Remedies available to the lender if you default on the account. These may include foreclosure in the case of mortgages; repossession in the case of financing for cars, appliances and other hard goods; and/or filing a lawsuit to claim unpaid balances.
- In the case of credit cards with reward programs, the nature of those rewards (cash back, miles or points), how they are allocated and how to redeem them.
- Information on how payments and other account information are reported to the national credit bureaus (Experian, TransUnion and Equifax).
- Instructions on how to lodge disputes about credit card charges, fees or other transactions you disagree with, and the manner by which those disputes will be resolved.
- Responsibilities of any cosigners on the loan or revolving account and, in the case of a credit card account to which you add an authorized user, your responsibility for covering payments on any transactions they make.
Do I Need to Sign a Credit Agreement?
Yes, you need to sign a credit agreement for it to be valid. Before you receive a loan or can activate and use a credit card or other revolving credit, both you and the credit issuer must sign the credit agreement to indicate the terms are acceptable.
In the case of mortgages, car loans and retail financing agreements, you typically sign on a hard copy or electronic screen to indicate acceptance of the credit agreement. With a credit card, your signature on a credit application binds you to the terms of the credit agreement if your application is accepted.
Are Credit Agreements Legally Binding?
Yes, credit agreements are formal contracts and signing one legally obligates you to meet its terms. Violation of those terms can give the lender recourse to file suit against you, seize collateral on secured credit such as mortgages and car loans, and have liens placed against your property.
Can the Terms of a Credit Agreement Change?
The terms of a credit agreement, much like the terms of any other legal contract, can be changed by mutual agreement between the parties, via processes known as loan modifications or amendments to the credit agreement.
One potential cause of credit agreement modification is a borrower's request for relief in the face of unaffordable payments.
Lenders are under no obligation to honor requests to modify a credit agreement, but they may:
- Offer a temporary reduction or suspension of payments known as loan forbearance, which does not alter the credit agreement.
- Make a permanent change to the credit agreement that lowers the monthly payment—perhaps by reducing the interest rate and/or extending the number of required payments on the loan.
Credit Card Term Changes
Credit agreements for most credit cards also allow for the card issuer to modify or amend the terms of the agreement itself anytime, without the borrower's consent, provided they give advance notice in writing.
When changes in contract terms can cost you money, such as hikes in fees or interest charges, the issuer must give you 45 days' advance notice. They also must notify you of changes that don't affect costs, such as adjustments to bonus programs, but those changes aren't subject to the 45-day notice requirement.
You have the right to opt out of any change to a credit card agreement—but if you do so, the issuer may close your account. Closure of an account under these circumstances may be noted on your credit report but has no direct negative effect on your credit scores.
Loss of a credit card account reduces your total available credit, however. And if you have other credit cards with outstanding balances, it will raise your credit utilization rate, which can have negative effects on credit scores.
The Bottom Line
As the fine print that comes with any loan or revolving credit account, credit agreements can make for challenging reading. Nevertheless, it's prudent to review them before you borrow any funds. A credit agreement is a legal pact between you and your lender, and you should be familiar with its requirements, because violating them can bring penalties and legal liability.
If you're shopping for a new loan or credit card, checking your credit score for free from Experian can help you understand how lenders will view your application and, in turn, how favorable the borrowing terms you are likely to receive.