Financial Dictionary -> Debt -> Credit

Credit is a term used for many financial services that involve the borrowing of money. In its basic form credit refers to a legally binding agreement between a borrower and lender where the borrower receives money or assets and agrees to pay them back at a later date, sometimes with added interest. A lender is sometimes referred to as a creditor and a borrower is sometimes referred to as a debtor.

The credit card process is a very popular and widely used form of credit in which the borrower uses a card with a previously arranged limit to purchase items "on credit." Whatever has been purchased has to be paid back by a certain date (usually a month) or the borrower is considered in debt and will then have to make the repayment with added interest. Some forms of credit allow repayment of longer periods where regular installments are made.

There are many other forms of credit that work in the same way as credit cards but don't use the physical card system or aren't for everyday goods, such as trade finance credit for importing and exporting.

A loan is a form of credit over a longer term. Some mortgages (special loans for financing the purchase of a home) can have terms of 30 years.

It is not just houses that can be purchased on credit or finance; it is also common to purchase cars on finance. If you are looking for a stable vehicle with a bit of class but can only afford a banger then purchasing on finance allows you to payback the full amount over a number of years with added interest. Credit linked to specific items is knows as shop or personal loans.

A lot of stores have their own credit terms where you can buy items now and pay at a later date, such as a 90 day period. They often have their own special store credit cards that offer other incentives such as points which can be redeemed for products when the customer reaches a certain amount.

Most loans and credits have interest rates on repayment, which is a percentage added on to the original price are amount borrowed. This is how lenders make a profit.