credit

Credit
Definition of Credit 

What is credit?
1. A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company.
2. An accounting entry that either decreases assets or increases liabilities and equity on the company's balance sheet. On the company's income statement, a debit will reduce net income, while a credit will increase net income.

Managing Credit 
Managing and safe money

Credit enables people to obtain goods or services even if they do not have enough money to pay for them right away. For example, a person who cannot immedi­ately pay the full price of a car or a house may make the purchase on credit.

The word credit comes from the Latin word credo, meaning / trust. Moneylenders trust borrowers to pay them back. Sellers give credit to buyers because it in­creases sales and, ordinarily, the buyers pay interest. Buyers willingly pay interest for credit because they can use things they want while paying for them.

A credit rating establishes the extent to which a per­son or company can buy on credit or borrow money. Factors that contribute to a credit rating include income, financial reliability, and records of previous credit trans­actions. Organizations called credit bureaus compile credit ratings and provide this information to shops, business firms, and lending institutions.

Credit can promote economic growth and contribute to a nation's wealth. Business companies use credit to build factories or to buy equipment in order to increase the production of goods. Governments use credit to build schools, roads, and other public projects.

Types of credit. There are three major types of credit— consumer, commercial, and investment.

Consumer credit enables consumers to spend more money than they have at the time. A charge account or credit account is one kind of consumer credit. Most charge accounts involve no interest, but the full price of items bought through a charge account must be paid monthly. If the full amount is not paid by the specified date, many charge accounts require interest payments. Banks issue credit cards that can be used to charge pur­chases at many shops, restaurants, and other busi­nesses. Another kind of consumer credit is a hire pur­chase agreement. Payments on a hire purchase agreement are made over a stipulated period of time and, in most cases, include interest.

Commercial credit is used by companies to develop their business. They expect to repay the loans from their increased profit. Most of these loans are repaid within six months and so are called short-term credit.

Investment credit is a loan paid back over a period as long as 30 years, or even more. This kind of loan is called long-term credit. Examples include home mort­gages and corporate bonds. Businesses use investment credit to undertake a major project, such as the con­struction of a factory.

Lending institutions take money received from sav­ers and other customers and lend it on credit to those who need funds. Such institutions include banks, build­ing societies, credit unions, finance companies, and in­surance firms.

The terms of a loan are set forth in a loan contract. These terms include interest, maturity, and security. In­terest is paid by the borrower to the lender. It serves as compensation for giving up the use of the money, for waiting for repayment of the loan, and for risking the loss of the money. Maturity is the date by which the loan must be completely repaid. Security is something of value that a borrower pledges to the lender in case the loan is not repaid as promised. For example, the title of a house is the security on a home mortgage.

Credit and the economy. The availability of credit affects both the rate of economic growth and the level of prices. When credit is easy to get, people are able to buy more, and their demand for goods and services grows. In response to the growing demand, business companies may try to hire more workers to increase output. Credit also enables firms to buy new equipment to boost production. However, if output does not keep pace with demand, prices will increase. A continuing in­crease in prices is called inflation.

During periods of inflation, moneylenders may hesi­tate to grant credit. Inflation drives down the purchasing power of money, and so the money that lenders get back buys fewer goods and services than the amount they lent. If lenders expect a period of inflation to con­tinue, they may raise interest rates to make up for the loss in money value. When credit becomes harder to obtain, the reverse situation may result. Economic activ­ity may decline, and inflation may slow down or stop. Related articles: Bank, Credit card, Inflation, Building society, Credit union, Interest, Collection agency, Finance company, Mortgage, Hire purchase, and Pawnbroker.

Link List
Managing and Saving Money

Take Note:

Credit card is a plastic card which allows the holder to buy goods, services, and (sometimes) foreign currency on credit. Bank credit cards are widely accepted by many shops, hotels, restaurants, and businesses worldwide. Cardholders are usually invoiced monthly and, if they wish to delay payment, they pay a high rate of interest on the unpaid balance.

Some retail stores, hotel chains, and other businesses issue cards for use only in their own outlets. The first cards were issued by major U.S. companies in the 1920’s to facilitate payment at, for example, their hotels. Since 1950, when Diners Club Inc. introduced the first card for use at more than one outlet, the use of credit cards has  become extremely popular and widespread. Among the most accepted cards internationally are Visa and Mastercard/Eurocard/Access. These organization have issued hundreds of millions of credit cards in many countries.

Credit cards carry the cardholder's name and account number. The cardholder benefits from the easy payment service it provides; organizations that accept cards benefits from increased business; and the issuers profits from the high interest charged on unpaid balances, their fees and their commissions. Credit cards are sometime criticized because they encourage people to spend more than they can afford.