CREDIT


Credit is the ability to borrow money or access goods or services with the understanding that you'll pay later.

Lenders, merchants and service providers (known collectively as creditors) grant credit based on their confidence you can be trusted to pay back what you borrowed, along with any finance charges that may apply.

To the extent that creditors consider you worthy of their trust, you are said to be creditworthy, or to have "good credit."



What Is Credit?

How do you define credit? This term is broad with many different meanings in the financial world. Credit is generally defined as a contractual agreement in which a borrower receives something of value now and agrees to repay the lender at a later date—generally with interest. Sometimes, it may even involve crediting a 401(k), for instance.

Credit also refers to the creditworthiness or credit history of an individual or company. It also refers to an accounting entry that either decreases assets or increases liabilities and equity on a company's balance sheet.

How Credit Works

In the first and most common definition of the term, credit refers to an agreement to purchase a good 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 is via the use of credit cards. People tend to make purchases with credit cards because they may not have enough cash on hand to make the purchase. Accepting credit cards can help increase sales at retailers or between businesses.

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."

 

Service credit is an agreement between a consumer and a service provider such as a utility, cell phone, or cable service.

In other cases, credit refers to a deduction in the amount one owes. For example, imagine someone owes his credit card company $1,000, but he returns a purchase worth $300 to the store. He receives a credit on his account and then owes only $700.

Finally, credit is an entry that depicts In accounting to increase assets or decrease liability. So a credit increases net income on the company's income statement while debit reduces net income.

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