Credit
Credit formalizes trust into legally enforceable deferred payment.
Wikipedia / Wikimedia Commons
Credit is the trust that allows one party to provide money or resources to another party, with the second party promising to repay or return those resources at a later date, thereby generating a debt. It is a method of making reciprocity formal, legally enforceable, and extensible to a large group of unrelated people. Credit encompasses any form of deferred payment, including financial loans, goods, or services, and is extended by a creditor (lender) to a debtor (borrower).
- First use of 'credit rating'
- 1830s–1840s
Lore & Background
In the 19th century, general stores in agrarian communities kept ledgers of store credit. Farmers would buy on credit during the year and pay back their debts at harvest time after selling their crops. Credit cards became most prominent during the 1900s, with larger companies creating chains and using credit cards to make payments to any of these companies. The companies charged the cardholder an annual fee and chose billing methods, while each participating company was charged a percentage of total billings. This led to the creation of credit cards on behalf of banks around the world, including Bank of America's BankAmericard in 1958 and American Express' American Express Card in 1958 as a charge card, not a credit card. These expanded purchasing power to almost any service and allowed consumers to accumulate revolving credit, which permitted paying off a balance later while incurring a finance charge.
Reader's Guide
Credit is a foundational element of modern economies, enabling deferred payment and the creation of money. According to the source, the majority (97% as of December 2013) of the money in the UK economy is created as credit. When a bank issues credit, it writes a negative entry in the liabilities column of its balance sheet and an equivalent positive figure on the assets column; the asset is the loan repayment income stream from a credit-worthy individual. When the debt is fully repaid, the credit and debt are canceled, and the money disappears from the economy. Most credit created goes into the purchase of land and property, creating inflation in those markets, which is a major driver of the economic cycle. The global credit market is three times the size of global equity. Credit is dependent on the reputation or creditworthiness of the entity responsible for the funds. The Equal Credit Opportunity Act of 1974 addressed discrimination, as until then women in America were given credit cards under stricter terms or not at all, and people of color were often unable to get credit to buy a house in white neighborhoods.
Did You Know?
- The term 'credit' was first used in English in the 1520s, from Latin creditum meaning 'a loan, thing entrusted to another.'
- The expression 'credit union' was first used in 1881 in American English; 'credit rating' was first used in the 1830s–1840s.
- According to the Bank of England, bank deposits (a form of credit) make up the vast majority of broad money in the UK economy, not specifically 'as of December 2013'.
- The global credit market is roughly 1.2 times the size of global equity, not three times.
Frequently Asked Questions
What is Credit in finance?
Credit is the arrangement in which one party extends money, goods, or services to another with the understanding they will be repaid later, thereby creating a debt. It essentially converts informal trust into a legally enforceable promise of deferred payment.
Where does the word 'Credit' come from?
The term entered English in the 1520s through Middle French crédit and Italian credito, both tracing back to the Latin creditum, meaning a loan or something entrusted to another. The root verb credere simply means 'to trust' or 'to entrust.'
What are the main historical and modern forms of Credit?
Store credit in 19th-century agrarian communities was a key early form of the concept. Today, bank-issued credit accounts for the largest share of all credit in existence.
Who are the two parties in a Credit relationship?
The party extending the resources is called the creditor (lender), while the party receiving them and promising to repay is the debtor (borrower). This framework applies whether the credit involves cash, goods, or services.
Why is Credit considered important in finance?
Credit makes reciprocity formal, legally enforceable, and scalable to large groups of unrelated people. Without it, trade and investment would be confined to small circles where personal trust alone could guarantee repayment.
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