Credit, What Is It?
Credit as a financial term, used in such terms as credit card, refers
to the granting of a loan and the creation of
debt.
Any movement of financial capital is normally quite dependent on credit, which
in turn is dependent on the reputation or creditworthiness (credit
risk) of the entity which takes responsibility for the funds.
A similar usage is in commercial trade, where credit is used to refer to the
approval for delayed payments for goods purchased. Companies frequently offer
credit to their customers as part of the terms of a purchase agreement.
Organizations that offer credit to their customers frequently employ a Credit
Manager.
Credit is denominated by a unit of account. Unlike money (strict definition)
credit can not itself act as a unit of account.
Credit is also a traded in the market. The purest form is the "Credit Default
Swap" market which is essentially a traded market in credit insurance, i.e. a
credit default swap represents the price at which two counterparties will
exchange this risk - the protection 'seller' takes the risk of default of the
credit in return for a payment, commonly denoted in basis points (1/100 of a %)
of the notional amount to be referenced, while the protection 'buyer' pays this
premium and in the case of default of the underlying (a loan, bond or other
receivable), delivers this receivable to the protection seller and receives from
the seller the par amount (i.e. is made whole.)
Source: Wikipedia
