What Is Credit?
How do you define credit? This term has many meanings in the financial world, but credit is generally defined as a contract agreement in which a borrower receives a sum of money or something of value and repays the lender at a later date, generally with interest.
Credit also may refer to the creditworthiness or credit history of an individual or a company. To an accountant, it refers to a bookkeeping entry that either decreases assets or increases liabilities and equity on a company's balance sheet.
KEY TAKEAWAYS
Credit is generally defined as an agreement between a lender and a borrower.
Credit also refers to an individual or business' creditworthiness or credit history.
In accounting, a credit may either decrease assets or increase liabilities as well as decrease expenses or increase revenue.
How Credit Works
In its first and most common-used definition, credit refers to an agreement to purchase a product or service with the express promise to pay for it later. This is known as buying on credit.
The most common form of buying on credit today is via the use of credit cards. This introduces a middleman to the credit agreement: the bank that issued the card repays the merchant in full and extends credit to the buyer, who may repay the bank over time.
The amount of money a consumer or business has available to borrow—or their creditworthiness—is also called credit. For example, someone may say, "He has great credit, so he's not worried about the bank rejecting his mortgage application."
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