Credit

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What is 'Credit'

Credit is a contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company.

2. An accounting entry that either decreases assets or increases liabilities and equity on the company's balance sheet. On the company's income statement, a debit will reduce net income, while a credit will increase net income.

BREAKING DOWN 'Credit'

1. The amount of money available to be borrowed by an individual or a company is referred to as credit because it must be paid back to the lender at some point in the future. For example, when you make a purchase at your local mall with your VISA card it is considered a form of credit because you are buying goods with the understanding that you'll need to pay for them later.

2. For example, on a company's balance sheet, a debit will increase the inventory account (an asset) if the company buys merchandise for resale on credit. On the other hand, a credit will increase the company's accounts payable (a liability).

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RELATED FAQS
  1. Why do high profiting sales mitigate credit risk?

    Learn more about credit risk in loaning to individuals and businesses. Understand how credit risk is determined and the impact ... Read Answer >>
  2. What is the difference between available credit and credit limit?

    Explore the difference between available credit and credit limit and the implications different account balances have on ... Read Answer >>
  3. Do all banks use the Five Cs of Credit when evaluating potential borrowers?

    Understand how lenders analyze a new credit application from a borrower, and learn why the five Cs of credit are an important ... Read Answer >>
  4. What is the most important "C" in the Five Cs of Credit?

    Learn how the five C's of credit affect new credit application decisions, and understand how a lender analyzes each aspect ... Read Answer >>
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    Learn how to improve your chances of being approved for a credit limit increase by understanding what lenders are looking ... Read Answer >>
  6. What information do lenders need when I apply for a credit limit increase?

    Increase your credit limit by making sure your current credit is paid on time and by paying the largest amount you can afford ... Read Answer >>
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