Credit refers to providing resources or granting a loan to one party by another. The party which receives the loan does not immediately reimburse the loan provider thereby giving rise to a debt. The borrower goes for repaying or returning those resources of same value at a subsequent date. Credit actually refers to a type of deferred payment. The party which gives the resources is known as a creditor or lender, while the receiving party is called a borrower.
Financial capital movements are usually dependent on equity transfers or credit. Credit depends on the credit worthiness of the party which borrows the funds. A formal monetary system is not always the basis for credit. The concept of credit may also be applicable in barter economies.
Contrary to money, credit cannot by itself act as an account unit. However, different types of credit may play the role of an exchange medium. Thus several types of credit are often called money and included in money supply estimation.
Types of credit
Understanding of the various credit types will help you in better credit management.
In the field of commercial trade, trade credit refers to granting permission for making delayed payments for goods and services by a company on purchases made by a customer. These are the major types of consumer credit.
• Loans: Loans allow you to borrow money which is to be repaid along with interest. Loans are obtained for a variety of purpose like financing for a new car, buying or renovation of a home and also for paying tuition fees. You can also get a debt consolidation fund, which works by combining in all present debts from many creditors into a single lesser interest payment scheme. You may even obtain a credit line to be linked to your savings account which will give you protection against check bouncing, in case you issue a check for the amount exceeding your balance in the account. Loans may be divided into these types:
a) Secured loans: These come with a guarantee of collateral like a home, car or cash deposit.
b) Unsecured loans: These types of loans do not need any collateral and are provided entirely based on your credit worthiness and capacity to repay.
c) Installment loans: This type of loan is paid back in fixed monthly installment mode throughout a specified time period. Mortgages and auto loans are certain types of installment loans.
• Credit cards: These are different from installment loans in the sense that credit cards permit repeated transactions till the maximum credit limit, set forth by the card issuer. Every time you purchase something using your credit card, you are basically borrowing money till you repay it. If you pay the amount gradually over time, the card issuer will add finance charges to your credit card account. You will be asked to make a calculated payment every month until the total amount is repaid.
For a good credit history, you must ensure saving for emergencies, paying bills immediately and fully understanding the agreement terms of a loan or a credit card.