Khalq: the common physical or spiritual creation of mankind in its state of potentiality, which is more or less the same in all human beings. These physical characteristics are not the factors which determine whether we are good bad. There can be no possible form of creation for mankind, other than the one that we have, which would better serve the purpose of our creation – this being to achieve utmost closeness to God – and this is something unattainable by any other form of creation.
What makes us a better human being is not our physical creation; our physical creation has been taken care of by God in the best possible way.
Khulq: This is what we are able to acquire. It refers to those aspects of a human being – good or bad qualities, virtues or vices – which are shaped and formed over time. The ability to elevate or degrade ourselves spiritually is related to our khulq. This is the moral side of our creation wherein lies the real difference between people.
In this world the physical appearance of people is seen and the reality of their moral qualities is generally hidden. However, on the Day of Judgment, the qualities of the soul become obvious and people will be judged based on them.