What is the difference between a creditor and a debtor?

Have you ever let a friend borrow money? If so, you’ve acted as a creditor and your friend acted as a debtor. Whether someone borrows money from a friend or a financial institution, it’s important for debtors and creditors to maintain a good relationship.

But what exactly are creditors and how are they different from debtors? Read more about creditors and debtors and learn the role each one plays in the lending process. 

Key takeaways

• A creditor can be a person or financial institution—like a bank or credit card issuer—that offers credit to another party. The party that borrows the credit is called a debtor.
• Creditors may choose to report a debtor’s account activity—like payment history, credit limits and balances—to credit reporting agencies.
• Creditors typically consider a borrower’s creditworthiness when setting loan terms, including interest rates.
• Creditors may charge interest on the money they lend to debtors. This is often how creditors make money. 

According to the Consumer Financial Protection Bureau (CFPB), a creditor is “any person who offers or extends credit creating a debt or to whom a debt is owed.” A financial institution, individual or nonprofit could all be examples of creditors, so long as they lend money to another party. 

When people talk about creditors, they typically mean financial institutions like banks or credit card issuers. This type of creditor often uses some type of approval process to determine a borrower’s eligibility for their financial products. They may enter into legally binding contracts with the party that’s borrowing money. These agreements may contain loan terms and conditions, such as repayment timelines, APR fees and more.   

Some people may choose a different route for borrowing money—like asking someone they know for a loan. If an individual lends money to a friend or family member, they may be called a personal creditor. 

A recent Bankrate study found that 69% of American adults have loaned money to their friends or family members at some point. If you’re considering acting as a personal creditor, it may be helpful to read the CFPB’s guide on family lending and borrowing best practices.

A debtor, sometimes called a borrower, is an individual or company that borrows money from a creditor. Debtors typically have certain financial responsibilities, such as repaying the creditor according to the terms stated in the loan agreement. 

Creditors may assess the potential risks of lending to a debtor, so a debtor’s creditworthiness may influence which loans, interest rates and terms a creditor offers them.

Any party that lends money to another party may be considered a creditor. Banks, mortgage lenders, car dealers or even family members or friends could act as creditors. 

However, different organizations may offer different types of loans. And the type of loan a creditor offers can influence the relationship between a creditor and a debtor. Debt is often classified into two types: secured and unsecured.

• Secured debt is backed by collateral. Secured loans, like those offered by mortgage lenders and auto lenders, require debtors to put up collateral—like their home or car—to secure a loan. These creditors may have the right to repossess this collateral if the debtor defaults on the loan. 
• Unsecured debt—like many personal loans or credit cards—doesn’t require collateral. Though there are secured credit cards. Because unsecured loans may pose more risks to creditors, they may come with higher interest rates or have stricter approval qualifications. 

Creditors play an important role in the lending process. Creditors—like mortgage lenders, credit card issuers and financial institutions—may use an underwriting process to determine a potential debtor’s eligibility for loans or lines of credit. 

This process often involves screening a borrower’s financial information—like their current debts, income and credit history. Credit card issuers, for example, may have certain approval requirements. Minimum credit scores or debt-to-income ratios may be required for borrowers to qualify for financial products. 

Some creditors, like banks and credit unions, may be subject to federal regulations. Under the Truth in Lending Act, for instance, creditors are responsible for transparently communicating loan terms to borrowers.

Creditors could also report a debtor’s payment history to the major credit reporting agencies—Experian®, TransUnion® and Equifax®. But they aren’t legally required to do so. 

A debtor is typically responsible for repaying a loan according to the terms specified in the loan agreement. Making late payments or stopping payments on a loan could have consequences for a debtor.

If a creditor reports a debtor’s payment history to the reporting agencies, this information could show up on the debtor’s credit reports and affect their credit scores. And higher credit scores could mean a better chance of being approved for loans, plus better rates and terms on those loans.

Here are some steps you could consider to potentially boost your credit scores:

• Make consistent, on-time payments.
• Lower your credit utilization ratio.  
• Only apply for the credit you need.

As you start to build or rebuild your credit, you can monitor it with a tool like CreditWise from Capital One. It’s free for everyone, and using it won’t impact your credit scores. You can also visit AnnualCreditReport.com to learn how to get free copies of your credit reports.

If you’re thinking about applying for credit, you’ll probably take on the role of a debtor. You could consider steps to boost your scores—like making on-time payments and monitoring your credit reports—to help you receive better offers from creditors. You can read more about how lenders determine a potential borrower’s creditworthiness. 

Also, exploring your pre-approval options might help you make informed financial decisions. You can see if you’re pre-approved for a Capital One credit card offer before you apply. And the best part is, checking your eligible offers won’t harm your credit scores. But if you decide to apply for a credit card, your scores may be affected.