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Before receiving your loan funds or credit card, you must accept the fine print spelled out in your credit agreement, which includes important details such as your interest rate, payment amount, loan term and much more. Reviewing it carefully before signing can help prevent future misunderstandings about your financial obligations.
Read on to learn how credit agreements work, what's included and whether they can change after an account is open.
What Is a Credit Agreement?
A credit agreement is a legally binding contract between a borrower and lender that explains the terms and conditions of an installment loan or revolving line of credit. It describes the rights and responsibilities of the lender and borrower and lists the consequences the borrower may suffer if they don't make their payments as agreed.
What Do Credit Agreements Include?
While exact details vary based on state and federal laws, lender and account type, common components include:
- Loan amount: Installment loan agreements list the amount you're borrowing, and revolving credit lines list your credit limit.
- APR: You should receive information about the loan's annual percentage rate (APR) and total interest you'll pay over the life of the loan if you make your payments on time. With a variable-rate loan, the agreement should explain how the rate is determined and how often it resets. Credit card agreements list APRs for different types of transactions, such as purchases, balance transfers and cash advances.
- Payment amount and due date: Payments for fixed-rate installment loans won't change from month to month, but credit card minimums may change based on your balance at the end of the billing cycle. Your credit agreement will tell you where to find information about the minimum amount due and your payment due date.
- Loan term: A loan term is the amount of time you have to repay a loan. The agreement also lists the number of payments you need to make throughout the loan term.
- Fees: Late payments, prepayment penalties and other charges you might incur are included in a credit agreement.
- Grace periods: Grace periods give borrowers a window after the due date to make their payment without incurring late fees or additional interest charges.
- Cosigner/authorized-user rules: If you have a cosigner on an installment loan, the agreement will list their responsibilities if you're unable to make your payments. Credit card agreements that include authorized users list the cardholder's responsibility for all charges, regardless of who makes them.
- Dispute resolution procedures: Credit card agreements include procedures for disputing charges, fees and other transactions you disagree with and explain how they'll be resolved.
- Consequences of missed payments: Creditors often charge late fees for payments not received on time and report payments that are more than 30 days late to the three major credit bureaus (Experian, TransUnion and Equifax).
- Rewards program details: If you have a rewards credit card, your agreement should include the type of rewards you'll earn, such as cash back, miles or points, the rewards rate and how you can redeem them.
- Lender remedies: This section outlines when an account will be in default and the rights a lender has to recoup its losses if you default on your loan. If you have an auto loan or mortgage, the lender can usually seize your property through repossession or foreclosure. For unsecured loans or lines of credit, lenders may be able to file a lawsuit to claim unpaid balances.
Credit Agreement Example
The lender approves your mortgage application to buy your first home. You receive a stack of paperwork to review the terms and conditions.
The credit agreement lists the mortgage amount at $350,000 with an interest rate of 6.5% and a 30-year term. The lender calculates your monthly principal and interest payments at $2,212 due on the first of each month. You'll pay $446,406 in interest over the life of the loan, and a late fee equal to 5% of the monthly principal and interest due if your payment is more than 15 days late. The lender may begin foreclosure proceedings if you're more than 120 days delinquent on your payments.
Do I Need to Sign a Credit Agreement?
Typically, you and the creditor need to sign a credit agreement for it to be valid. However, signing can take multiple forms. For example, you may sign a hard copy at a mortgage or auto loan closing. But if you apply for a personal loan online, you might be able to e-sign the loan documents from your computer.
When you get a credit card, you don't generally need to sign another document after your application is approved. Using the card signals acceptance of and binds you to the terms of the credit agreement.
Are Credit Agreements Legally Binding?
Yes, credit agreements are legally binding contracts that obligate you to the terms and conditions in the agreement. If you don't satisfy the requirements, the lender may have the right to seize your property or file a lawsuit against you to recoup its losses.
Can the Terms of a Credit Agreement Change?
The terms of a credit agreement for installment loans generally don't change, but there are some exceptions. For example, your interest rate might change if you have a variable-rate loan because the potential for your rate to fluctuate was included in the agreement.
Additionally, if you experience financial hardship and can't afford your payments, the lender might grant a loan modification. Lenders aren't required to agree to loan modification requests. But when they do, it permanently changes the credit agreement to lower the monthly payment by reducing the interest rate, extending the loan term or replacing a variable rate with a fixed rate. In some situations, lenders may also forgive a portion of the principal or adjust your payments based on your income.
Credit Card Term Changes
Credit card agreements work differently. Typically, a card issuer can modify or amend the terms of the agreement at any time without the borrower's permission. Changes to interest rates, fees, minimum payments, grace periods or how interest is calculated must be communicated in writing at least 45 days before they take effect. Other modifications, such as adjustments to rewards programs, don't require 45 days' notice, but the issuer still has to let you know.
You can opt out of any change the card issuer makes, but if you do, the issuer may close your account. If you're carrying a balance when the account is closed, you're responsible for making payments until it is paid in full.
The closed account will appear on your credit reports, and it will decrease your total available credit. Your credit utilization will increase if you have other credit cards with outstanding balances, which can negatively affect your credit scores.
How to Find Your Credit Agreement
For a copy of your credit agreement, review your original account-opening documentation or check your online account for the terms and conditions. If you don't have the original paperwork and can't find the information in your online account, contact the lender or credit card issuer to request a copy.
The Bottom Line
It might be tempting to sign a credit agreement without reading it, but that's not a good idea. Understanding all the terms and conditions before you sign can help prevent misunderstandings that might lead to violations of the agreement, which could result in fees and other penalties.
If you're shopping for a new loan or credit card, you can check your FICO® Score☉ Θ for free from Experian to get an idea of how lenders will view your application and what terms you're likely to receive.