Credit / Credit services, credit (from Latin credit, “(he/she/it) believes”) is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt), but promises either to repay or return those resources (or other materials of equal value) at a later date. In other words, cre dit is a method of making reciprocity formal, legally enforceable, and extensible to a large group of unrelated people.
The resources provided may be financial (e.g. granting a loan), or they may consist of goods or services (e.g. consumer cre dit). cre dit encompasses any form of deferred payment. cre dit is extended by a creditor, also known as a lender, to a debtor, also known as a borrower.
Credit / Credit services
Etymology of credit
The term “cre dit” was first used in English in the 1520s. The term came “from Middle French cré’dit (15c.) “belief, trust,” from Italian cre dito, from Latin cre ditum “a loan, thing entrusted to another,” from past participle of credere “to trust, entrust, believe”. The commercial meaning of “cre dit” “was the original one in English (cre ditor is [from] mid-15c.)” The derivative expression “cre dit union” was first used in 1881 in American English; the expression “cre dit rating” was first used in 1958.
History of credit
cre dit cards became most prominent during the 1900s. Larger companies began creating chains with other companies and used a cre dit cards as a way to make payments to any of these companies. The companies charged the cardholder a certain annual fee and chose their billing methods while each participating company was charged a percentage of total billings. This led to the creation of cre dit cards on behalf of banks around the world.
Some other first bank-issued cre dit cards include Bank of America’s Bank Americard in 1958 and American Express’ American Express Card also in 1958. These worked similarly to the company-issued cre dit cards; however, they expanded purchasing power to almost any service and they allowed a consumer to accumulate revolving cre dit. Revolving cre dit was a means to pay off a balance at a later date while incurring a finance charge for the balance.
Discrimination
Until the Equal cre dit Opportunity Act in 1974, women in America were given cre dit cards under stricter terms, or not at all. It could be hard for a woman to buy a house without a male co-signer. In the past, even when not explicitly barred from them, people of color were often unable to get cre dit to buy a house in white neighborhoods.
Bank-issued cre dit
Bank-issued cre dit makes up the largest proportion of cre dit in existence. The traditional view of banks as intermediaries between savers and borrowers is incorrect. Modern banking is about cre dit creation. cre dit is made up of two parts, the cre dit (money) and its corresponding debt, which requires repayment with interest. The majority (97% as of December 2013) of the money in the UK economy is created as cre dit. When a bank issues cre’dit (i.e. makes a loan), it writes a negative entry into the liabilities column of its balance sheet, and an equivalent positive figure on the assets column; the asset being the loan repayment income stream (plus interest) from a cre’dit-worthy individual.
When the debt is fully repaid, the cre’dit and debt are canceled, and the money disappears from the economy. Meanwhile, the debtor receives a positive cash balance (which is used to purchase something like a house), but also an equivalent negative liability to be repaid to the bank over the duration. Most of the cre’dit created goes into the purchase of land and property, creating inflation in those markets, which is a major driver of the economic cycle.
When a bank creates credit, it effectively owes the money to itself. If a bank issues too much bad credit (those debtors who are unable to pay it back), the bank will become insolvent; having more liabilities than assets. That the bank never had the money to lend in the first place is immaterial – the banking license affords banks to create credit – what matters is that a bank’s total assets are greater than its total liabilities and that it is holding sufficient liquid assets – such as cash – to meet its obligations to its debtors. If it fails to do this it risks bankruptcy or banking license withdrawal.
There are two main forms of private credit created by banks; unsecured (non-collateralized) credit such as consumer credit cards and small unsecured loans, and secured (collateralized) credit, typically secured against the item being purchased with the money (house, boat, car, etc.). To reduce their exposure to the risk of not getting their money back (credit default), banks will tend to issue large credit sums to those deemed credit-worthy, and also to require collateral; something of equivalent value to the loan,
which will be passed to the bank if the debtor fails to meet the repayment terms of the loan. In this instance, the bank uses the sale of the collateral to reduce its liabilities. Examples of secured credit include consumer mortgages used to buy houses, boats, etc., and PCP (personal contract plan) cre dit agreements for automobile purchases.
Movements of financial capital are normally dependent on either credit or equity transfers. The global credit market is three times the size of global equity. Credit is in turn dependent on the reputation or creditworthiness of the entity which takes responsibility for the funds. Credit is also traded in financial markets. The purest form is the credit default swap market, which is essentially a traded market in cr edit insurance.
A cr edit default swap represents the price at which two parties exchange this risk – the protection seller takes the risk of default of the cre dit in return for a payment, commonly denoted in basis points (one basis point is 1/100 of a percent) of the notional amount to be referenced, while the protection buyer pays this premium and in the case of default of the underlying (a loan, bond or other receivable), delivers this receivable to the protection seller and receives from the seller the paramount (that is, is made whole).
Types of credit
Trade credit
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In commercial trade, the term “trade-credit” refers to the approval of delayed payment for purchased goods. Cre dit is sometimes not granted to a buyer who has financial instability or difficulty. Companies frequently offer trade credit to their customers as part of the terms of a purchase agreement. Organizations that offer cre dit to their customers frequently employ a cre dit manager.
Consumer credit
The cost of care dit is the additional amount, over and above the amount borrowed, that the borrower has to pay. It includes interest, arrangement fees, and any other charges. Some costs are mandatory and required by the lender as an integral part of the cre dit agreement. Other costs, such as those for cre dit insurance, may be optional; the borrower chooses whether or not they are included as part of the agreement. Consumer cre dit can be defined as “money, goods or services provided to an individual in the absence of immediate payment”. Common forms of consumer cre dit include cre dit cards, store cards, motor vehicle finance,
personal loans (installment loans), consumer lines of cr dit, payday loans, retail loans (retail installment loans), and mortgages. This is a broad definition of consumer cre’dit and corresponds with the Bank of England’s definition of “Lending to individuals”. Given the size and nature of the mortgage market, many observers classify mortgage lending as a separate category of personal borrowing, and consequently, residential mortgages are excluded from some definitions of consumer cre dit, such as the one adopted by the U.S. Federal Reserve.
Interest and other charges are presented in a variety of different ways, but under many legislative regimes, lenders are required to quote all mandatory charges in the form of an annual percentage rate (APR). The goal of the APR calculation is to promote “truth in lending”, to give potential borrowers a clear measure of the true cost of borrowing, and to allow a comparison to be made between competing products. The APR is derived from the pattern of advances and repayments made during the agreement. Optional charges are usually not included in the APR calculation.
Interest rates on loans to consumers, whether mortgages or cre dit cards are most commonly determined with reference to a cre’dit score. Calculated by private cre’dit rating agencies or centralized cre dit bureaus based on factors such as prior defaults, payment history, and available cre’dit, individuals with higher cre’dit scores have access to lower APRs than those with lower scores.
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