Credit (definition)

Credit

Credit is most commonly defined as the act of giving recognition or approval. In the financial sense, it is the act of a lender approving the transfer of money between their accounts and the borrower's.

Credit can take several shapes, briefly one shape is that of a loan based on an asset that is used as collateral. For example a mortgage with a home as collateral, or an automobile loan. In a loan of this type, if the borrower fails to make the agreed upon payments, the lender typically has the right to take possession of the property, in order to recover all or some of the amount owed.

Another type of credit is unsecured credit, such as a credit card or revolving loan. Normally the money is not transferred upon the signing of the agreement, but is simply made available for later use. The borrower can use the credit line to make a future purchase from either the company itself (such as a department store or gasoline service station) or, in the case of a credit card, an independent merchant. After the purchase, the lender will reimburse the merchant for the amount of the purchase, and the borrower will be required to begin repayment to the lender. The reason the credit is considered unsecured is that the lender has no ability to repossess that which you purchased with the money they lent you. Not that they would normally want to anyway!

Once you accept credit, you have acquired debt, and are technically called a debtor. That's not necessarily a bad thing, such as you've read in classic novels about people being thrown in "debtor's prisons", that is very unlikely to happen to you, I assure you.