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Credit – definition and meaning

The word credit in business refers to either money, a product, or a loan facility. Credit may also refer to adding money to a person’s bank account. For example:  “We credited your account with $100.” If you have a positive balance in a bank account, it is ‘in credit.’

The opposite of credit is debit or debt.

The term comes from Latin ‘credere’, which means ‘to believe’ (to give credence). Hence, it is the trust which allows a lender to provide funds to a borrower, who arranges to pay back at a later date.

Credit in Spanish and Portugues is crédito, French – crédit, Italian – credito, German – Kredit, Russian – кредит, Japanese – クレジット, and Chinese – 信贷.

The term may include the provision of money (loan), or goods or services, as in consumer credit. It encompasses any arrangement where people pay later. The party lending the money or service is known as the creditor, while the borrower is the debtor.

Credit - meaning and example
In this arrangement, the dairy farmer is getting his wool today. However, he is paying for it over a period of 3 months.

The arrangement might not involve the exchange of money. In a barter situation, for example, the parties deal with goods or services.

For example, one party may provide 200 kilograms of wool while the other delivers milk. However, the second party delivers the milk over a period of three months.

The supplier of wool is the creditor, while the debtor pays back over a set period with daily deliveries of milk.

According to the Financial Times Lexicon, credit is:

“Any sum of money advanced as a loan, or available for loan. Also, money received in an account – a positive accounting entry.”

In many countries, people borrow money to buy everything from clothes, groceries, computers, vacation trips, to cars and homes. According to Debt.org, many people struggle with too much debt.

What is your credit limit?

If you have a credit card, they will tell you what your credit limit is. So will a retailer if you have a retail card. This is the full amount you can borrow.

Your ‘available credit’ means how much you can borrow at the moment. We calculate it by subtracting how much you currently owe from your limit. For example, if your limit is $4,000, and you owe $1,800, you have $2,200 available.

Banks and retailers decide what your limit is according to how long you have been a customer. They also consider how promptly you settle your debts, your income, your current debts, and your age.

Additionally, whether you own a house influences how much they will lend you.

If you manage your account properly, the lender will probably increase your limit from time to time.

Offering countries credit

The International Monetary Fund (IMF) extends loans to countries with financial difficulties.

Countries receiving loans must agree to implement a set of policies. These policies help them get out of their economic problems.

Video – What is credit?

This Capital One Canada video explains what credit is. It also shows some of the most common types, and their uses.