A small part of understanding how your credit works are the actual terms used to describe your debt. You can read how I get out of debt if you want to understand the journey. Let’s begin by going into the differences between creditor and debtor:
A debtor is the borrower. This can be a person, a business or any other legal entity. The creditor is the bank or whoever you take the loan from. To put it simply the debtor is the owner of debt and the creditor is the owner of credit. Let’s dig into the nuances.
An easy way to think of it is bank (creditor) and you borrowing from the bank (debtor). This happens when you borrow money from the bank by taking out a loan or using a credit card. For loans, these could be small business loans, personal loans, auto loans, and home loans.
What is a debtor?
A debtor means a person (or legal entity like an LLC) who borrows money. So if you’ve taken a car loan or home loan, you are the debtor while you owe the bank (the creditor) money. If you’re reading this, you’re most likely the debtor. It’s okay, debt is a common issue among many people and financial literacy is not made a big issue in America because the banks WANT you to have debt.
Any time you take out a loan or have to apply for a credit card, the creditor will need to see that you have credibility. This comes in the form of a credit score. I personally made a lot of the common credit card mistakes that tanked my score at an early age. That’s why you should learn the essential credit tips for an excellent credit score. Before going into any debt, you’ll need to understand the difference between loans and leases.
I got out of debt and it took a lot of work. Learning to spend responsibly is a hard skill to pick up but an essential life skill to have. If you’re in debt, I recommend learning how no interest credit cards work and how you can use them to get out of debt. Heck, you might even have escheated property that the state owes you. When you get a strong enough credit score, you’ll need to learn how to freeze your credit so you can protect it from fraud. In the event of fraud, just learn how chargebacks work and you’ll be fine.
What is a debtor in possession?
Also known as a DIP, a debtor in possessions is a person or legal entity that has filed for Bankruptcy. The person/business is still in possession of assets that have value. Since they declared bankruptcy and can’t pay back the creditor, the bank is going to want those assets. A common example is if you default on paying your home or car (assets), the assets are going to get taken by the bank. It’s exactly like the game Monopoly.
As the debtor, you may be required to have someone cosign your loan if you have a low credit score, income and few assets. The bank need to hold someone accountable if you default on the loan because they don’t trust you. It’s as simple as that. You should understand how cosigning a loan works so you’ll know what you’re in for.
The thing I find crazy is that they will have someone with good credit cosign your loan and hold them responsible if you default, BUT they will use your bad credit score to determine the APR of your loan. That’s because the bank wants to make a lot more money. Don’t worry, you can beat the banks. Sly Credit has the best bank tips.
You’ll need to really understand how your credit score works so you can build it up properly. With a good credit score, you can get low rates and apply for bank bonuses. Banks have bonuses for signing up for credit cards, checking accounts, savings accounts and investor accounts. You can make a few thousand dollars a year just signing up for these bonuses which I’ll cover in a future post. Look forward to it!
What is a creditor?
A creditor is a bank or person that loans out money. They provide “credit” to people or businesses with the incentive of making money on the credit, AKA loan. It’s very common for the creditor to be a bank that has credit cards you can apply for. If you get a credit card from the bank, that make the bank the creditor and you (the credit card holder) the debtor.
What is creditor example?
- If you’ve taken out a car loan, the bank is the creditor.
- An artist sells paintings. The buyer takes the painting and promises to pay later. The artist is the creditor.
What is the difference between debtor and creditor? The key difference between debtor and creditor is that if you’re reading this, you’re VERY likely the debtor. A debtor borrows money from the creditor.
Examples of the difference between debtor and creditor?
- The debtor, you, takes out a car loan for $10,000 from the bank (creditor).
- Another example is when you use a credit card. Each time you use your credit card, you are taking “credit” from the “creditor.” That’s why it’s a credit card. Then you’ll accrue debt as the debtor, and will have to pay your credit card “debt” on the statement date”
- You are a farmer that sells potatoes. Supermarkets buy your potatoes but promise to pay after they are sold. In this case, the farmer is the creditor and the supermarket is the debtor. Since the supermarket owes payment (debt) to the farmer.
Debtors in accounting? A debtor, in accounting terms, is a person or business that owes money.
Trade debtors and creditors: A trade debtor is a customer that hasn’t paid a company for its goods or services. That debt goes into the balance sheets of the business. In this case, since money is owed to the business, the business is the creditor.
Creditors depend on your credit score to determine if you are worthy of borrowing money. People with low credit scores often pay much more money long term than someone with good credit. I actually hate this system, because it’s a game designed to allow the bank to charge more money to people who don’t have it. That’s called the poverty premium, and yes you should be angry about it.
People with high interest rates often pay much much more money for a loan that can actually end up being more than double of the loan principle. John Oliver did an excellent video on the world of auto lending that you should absolutely see. It’s 18-minutes and worth your time.
It’s surprising, but having too many credit cards is not bad. I have had over 100 credit cards in the past decade and have a credit score over 800. Each of those credit cards had high credit limits and a lucrative sign-up bonus and I met those requirements through some manufactured spending. My favorite of which is buying stuff on Amazon for free. Crazy, right? More on that, you can actually make money from the cashback on those credit cards by making those purchases.
A debtor is very likely you. I say that because I don’t think the bank is reading this since. Just to put it lightly, the debtor is someone who borrows money from a lender (aka the Creditor). I don’t like borrowing money, but it sometimes you need to especially for big purchases. The credit system was designed to establish a credit worthiness of people, but seems more like a poverty premium. That’s because people with a low credit score have to pay more for the same goods as a person with a high credit score. Wealth disparity at its finest.
The credit system isn’t perfect, but if you learn how to use it in your favor you can take advantage of the system. If your credit score is really bad, you’ll be required to have someone cosign for your loan. There’s an alternative to cosigning your loan that you should definitely do. Hint: Improve your credit score.