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What is a credit?

Credit definition

In general, credit is a contractual agreement, in which one party provides money or other valuable resources to the other party, and the second party agrees to repay the lender at a predefined later date, generally with interest. 

Credit is provided by a creditor, also referred to as a lender, to a borrower, also known as a debtor.

Credit may also refer to a credit history, or creditworthiness of a company or an individual.

Key takeaways:

  • Credit is a financial tool that allows individuals or businesses to borrow money from a lender with the promise of paying it back over time, usually with interest.

  • Credit can take many forms, such as loans, credit cards, lines of credit, or mortgages.

  • Credit scores, which range from 300 to 850, are used by lenders to determine the creditworthiness of a borrower.

  • Good credit scores can help borrowers secure better interest rates and loan terms, while poor credit scores can result in higher interest rates or even loan denials.

Where have you heard about the credit?

The term ‘credit’ was first used in English in the 1520s. It came from the Middle French crédit (15 century), meaning “belief, trust”, from Italian credito and from Latin creditum, which means a loan, entrusted to another.

Commercial meaning of credit originated in English. The expression “credit rating” was first used in 1958.

What you need to know about credits

The first and the most common credit meaning refers to an agreement to buy something right now with a promise to pay for it later. The most popular form of buying on credit involves credit cards.

People used to make purchases with the help of credit cards, as they can not have enough cash on hand to buy what they want. Accepting credit cards facilitates sales between businesses.

The available sum of money, which can be borrowed by an individual or a company determines their creditworthiness and is also called a credit. 

Types of credit

There are many different types of credits. One of the most common and popular type is a bank credit. It includes mortgages, car loans, lines of credit, etc. Usually, when the bank provides a credit to its clients, it gives them money under the condition that the borrower would pay it back at a predetermined future date.

Money is not the only form of credit that can be offered. It can serve as an exchange of services and goods for a deferred payment. For example, when a supplier delivers goods without immediately receiving payment, it's also a form of credit. 

However, the 4 major credit types are the following:

  1. Revolving credit. This type of credit provides you with the ultimate credit limit. Each month you carry a balance and make a payment. Most credit cards work based on the form of revolving credit.

  2. Charge cards. Looking similar to revolving credit cards and used the same way, charge accounts has a major difference – you must pay the total balance each month.

  3. Service credit. An agreement with a service provider. Usually we receive electricity, gym membership, cell phone service under the agreement that you will pay for them each month.

  4. Installment credit. According to this credit type, a creditor gives you a particular amount of money, which you agree to repay in regular installments of a fixed amount. Mortgages and car loans can serve as the examples of installment credits.

Credits are often used not only to make big purchases, such as a car, a house or education. A good credit history may be important for your future employers and landlords during the selection process.

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