Credit

Loading the player...

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).

RELATED TERMS
  1. Debit

    An accounting entry that results in either an increase in assets ...
  2. Current Liabilities

    A company's debts or obligations that are due within one year. ...
  3. Credit Agency

    A for-profit company that collects information about individuals' ...
  4. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
  5. Account Balance

    1. The amount of money in a financial repository, such as a checking ...
  6. Bank Credit

    The amount of credit available to a company or individual from ...
Related Articles
  1. Credit & Loans

    Understanding Credit Risk

    Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt.
  2. Credit & Loans

    What's a Revolving Line of Credit?

    A revolving line of credit is an arrangement made between a company or an individual and a bank to borrow money on a short-term basis.
  3. Credit & Loans

    What Lenders Look at on Your Credit Report

    What do lenders consider when they look at your credit report? It’s a simple question with a complicated answer.
  4. Credit & Loans

    What Lenders Look At On Your Credit Report

    What do lenders consider when they look at your credit report? Several things, including your income and payment history.
  5. Markets

    Fundamental Analysis: The Balance Sheet

    By Ben McClureInvestors often overlook the balance sheet. Assets and liabilities aren't nearly as sexy as revenue and earnings. While earnings are important, they don't tell the whole story. ...
  6. Credit & Loans

    What are the Five C's of Credit?

    The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision. The five C’s are Character, Capacity, Capital, Collateral and Conditions. ...
  7. Credit & Loans

    How To Increase Your Appeal To Prospective Lenders

    Making a business eligible for loans/credit cards at the best possible rates requires crafting an excellent credit profile through the smart use of credit.
  8. Economics

    Explaining Debt

    Debt is any amount a borrower owes a lender.
  9. Entrepreneurship

    7 Unconventional Ways Businesses Can Borrow Money

    Find out how your business can get the money it needs - even when the bank says "no".
  10. Credit & Loans

    5 Keys To Unlocking A Better Credit Score

    Follow these tips and techniques to rebuild a ruined credit rating.
RELATED FAQS
  1. 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 >>
  2. How can I improve my chances of getting a credit limit increase?

    Learn how to improve your chances of being approved for a credit limit increase by understanding what lenders are looking ... Read Answer >>
  3. 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 >>
  4. How are accounts payable listed on a company's balance sheet?

    Find out how accounts payable is listed on a company's balance sheet, why it is considered a current liability, and how it ... Read Answer >>
  5. Does the balance sheet always balance?

    Yes, a balance sheet should always balance. The name "balance sheet" is based on the fact that assets will equal liabilities ... Read Answer >>
  6. What is the difference between the Five Cs of Credit and credit rating?

    Learn the difference between the five C's of credit and credit rating and how they are used together by banks and finance ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center