Credit

Credit is the provision of resources (such as granting a loan) by one party to another party in which the second part does not reimburse the first party immediately, generating a debt, and instead arranges either to pay or return those resources (or material (s) of equal value) at a later date. Is any form of deferred payment. The first part is called a creditor, also known as a lender, while the second part is called a debtor, also known as a borrower.

Capital movements are usually related financial credit or capital transfers. The credit is in turn dependent on the reputation or creditworthiness of the entity that takes responsibility for the funds.

Credit will not necessarily be based on formal monetary systems. The credit concept can be applied in barter economies based on the direct exchange of goods and services, and some go so far as to suggest that the true nature of money is best described as a representation of the relationship of debt credit that exist in society (Ingham 2004 p.12-19).

Credit is denominated by a unit of account. Unlike money (strict definition), credit itself can not act as a unit of account. However, many forms of credit can readily act as a medium of exchange. Therefore, various forms of credit are frequently referred to as money and are included in the estimates of the money supply.

Credit is also traded in the market. The purest form is the Credit Default Swap market, which is essentially a market for trade credit insurance. A credit default swap represents the price at which two parties exchange this risk – the protection “seller” takes the credit default risk in exchange for a fee, usually denoted in basis points (one basis point is 1 / 100 of one percent) of the theoretical amount referred, while the protection buyer “pays the premium and in case of breach of warranty (loan, bond or other receivable), delivers this receivable to the seller protection seller and receives from the nominal (ie, everything is done).

Trade credit
The word credit is used in trade to the term “trade” to refer to the approval of delayed payments for goods purchased. Credit is sometimes given to a person who has financial instability or difficulty. Companies often offer credit to customers as part of the terms of a purchase agreement. Organizations that offer credit to their customers frequently employ a credit manager.

Consumer credit
Loans consumer debt can be defined as “money, goods or services provided to a person in lieu of payment. Common forms of consumer credit includes credit cards, purchasing cards, motor (auto) finance, personal loans (delivery), retail loans (installment loans retail) and mortgages. This is a broad definition of consumer credit and corresponds to the Bank of England in the definition of “loans to individuals “. Given the size and nature of the mortgage market, many observers classify the mortgage loans in a separate category of personal loans and residential mortgages are thus excluded from some definitions of consumer credit – such as that adopted by the Federal Reserve in the U.S..

The cost of credit is the additional amount above the amount borrowed, the borrower must pay. It includes interest, arrangement fees and any other charges. Some costs are mandatory, required by the lender as part of the credit. Other costs such as credit insurance, may be optional. The borrower may choose whether or not included as part of the agreement.

Interest and other charges come in a variety of different ways, but in many legislative regimes lenders are required to include all mandatory costs in the form of an annual percentage rate (APR). The purpose of calculating the APR is to promote “truth in lending” to give prospective borrowers a clear measure of the true cost of borrowing and to allow comparisons between competing products. The APR is derived from the structure of advances and repayments made in the agreement. Optional charges are not included in the calculation of April so if there is a box in an application form that asks if the consumer wants to pay out insurance, then insurance costs will not be included in the calculation of the APR (Finlay 2009 ).