Credit
Credit is trust formalized into legally enforceable deferred payment.
Wikipedia / Wikimedia Commons
Credit is the trust that allows one party to provide money or resources to another party, who does not reimburse immediately but promises to repay or return equivalent value later. It formalizes reciprocity, making it legally enforceable and extensible to large groups 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'
- Early 20th century (Moody's founded in 1909)
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 prominent during the 1900s, with larger companies creating chains and using credit cards for payments among them. Companies charged cardholders an annual fee and chose billing methods, while participating companies were charged a percentage of total billings. This led to bank-issued credit cards, including Bank of America's Bank Americard in 1958 and American Express' American Express Card also in 1958, which expanded purchasing power and allowed revolving credit.
Reader's Guide
Credit is a foundational mechanism in modern economies, enabling deferred payment and the creation of money. Bank-issued credit constitutes the largest proportion of credit, with the majority of money in the UK economy (97% as of December 2013) created as credit. When a bank issues credit, it writes a negative entry in its liabilities column and an equivalent positive figure on the assets column; the asset is the loan repayment income stream. When the debt is fully repaid, the credit and debt cancel, and the money disappears. Most credit created goes into land and property purchases, driving inflation in those markets and influencing 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 women in America had previously been given credit cards under stricter terms or not at all, and people of color were often unable to get credit to buy houses in white neighborhoods.
Did You Know?
- The term 'credit' was first used in English in the 1520s, derived 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 in use by the early 20th century, with the first credit rating agency (Moody's) founded in 1909.
- Until the Equal Credit Opportunity Act in 1974, women in America could be denied credit cards or given them under stricter terms, and could find it hard to buy a house without a male co-signer.
- As of December 2013, 97% of the money in the UK economy was created as credit.
Frequently Asked Questions
What is Credit in finance and investment?
Credit is a trust-based arrangement in which one party lends money, goods, or services to another, who agrees to repay or return equivalent value at a later date. It turns informal reciprocity into a legally enforceable obligation that can scale across large groups of unrelated people.
Where does the word Credit come from?
The term entered English in the 1520s through Middle French crédit, which carried the sense of belief or trust. That French word traced back to Italian credito and ultimately to the Latin creditum, meaning a loan or something entrusted to another person.
What is a major legislative milestone tied to Credit?
The Equal Credit Opportunity Act of 1974 in the United States is cited as a key legislative milestone in credit history. It marked a significant step in formalizing the rules around how credit must be extended to borrowers.
How does Credit shape modern banking?
In the UK economy, as of December 2013, roughly 97 percent of all money in circulation was created as credit rather than as physical currency. This figure underscores how deeply contemporary banking systems depend on the credit mechanism to generate the money supply.
Who are the two key parties in a Credit arrangement?
A creditor (the lender) extends money, goods, or services to a debtor (the borrower), who then promises to repay or return equivalent value at a later time. This deferred-payment structure is what distinguishes credit from a simple immediate exchange.
More in Finance And Investment 1-24
Spotted an error? Know more?
This is a living reference — every entry is fact-audited, and reader corrections feed straight into our audit queue. Suggest an edit · See this site's audit record