What Is Credit?

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