What is credit? Definition and meaning

The word credit in the world of business and finance refers to either money, a product, or a service that is advanced as a loan, money added to a person’s bank account (we credited your account with $100), or a positive balance in a bank account (‘my account is $500 in credit’).

The opposite of credit is debit.

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, Chinese – 信贷.

Credit may include the provision of money (loan), or goods or services, as in consumer credit. It encompasses any form of delayed payment. The party lending the money or service is known as the creditor, and the borrowing party is the debtor.

CreditIn this arrangement, the dairy farmer is getting his wool today, and paying for it over a period of 3 months.

The arrangement might not involve the exchange of money. In a barter situation, for example, one party may provide 200 kilograms of wool in exchange for having 2 liters of milk delivered to his home for 3 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. A balance in the account-holder’s favor is a credit balance. The opposite of debit.”

In the advanced economies, and many other nations across the globe, people use credit to buy everything from clothes, groceries, computers, vacation trips, to cars and homes. According to Debt.org (America’s debt help organization) “Unfortunately, many people also struggle with credit.”

What is your credit limit?

If you have a credit card or an account with a retailer, they will tell you what your credit limit is. This is the full amount you are able to borrow.

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

Banks and retailers decide what your limit is according to how long you have been a customer, how prompt you have been in paying back what you owe, your income, your current debts, your age, whether you own a house, plus some other factors.

If you manage your account according to the conditions stipulated by the lender, your limit will probably be increased from time to time.

Countries may be offered credit facilities

The International Monetary Fund (IMF) extends credit facilities to countries with protracted balance of payment problems.

Under the Extended Credit Facility (ECF), countries receiving loans must agree to implement a set of policies that will help them get out of their economic problems and follow a stable and sustainable path.

ECF financing carries a zero interest rate through to the end of 2016, with a grace period of 5.5 years, and a final maturity of 10 years.

Video – What is credit?

This Capital One Canada video explains what credit is, shows some of the most common types, and what you can use them for.