Posted in Finance, Accounting and Economics Terms, Total Reads: 625
Derived from the Latin word credo, meaning “I believe”, credit is the trust that allows one party to supply resources (products, services, assets etc.) to another party and the other party does not need to pay back for the resources immediately but can pay after a pre-agreed period of time. The act of financing anything with a loan involves the use of credit in that situation.
The different types of credit include bank credit, commerce, consumer credit, investment credit, international, public credit, real estate etc.
For example, when an individual makes a purchase of an asset using his credit card, he is using credit because the amount has to be paid back to the bank in due course of time with the interest incurred.
The Six C’s of credit include
i) Character: Creditors look for people who are trustworthy and have a sound record of creditworthiness
ii) Capacity: This is the ability of individual to honor the credit and involves the individual’s financial recourse
iii) Collateral: The item that is pledged by the individual as security
iv) Conditions: These include the economic and regulatory conditions for the loan
v) Credit: This is the past credit history of the borrower
vi) Capital: This includes the amount of loan taken by the borrower.
Credit does not necessarily involve the use of money and includes barter economies as well. Credit is also a journal entry recording an increase in liability, equity or revenue or a decrease in expenses, assets or dividends. In accrual accounting, credit is recorded when income or revenue is earned.