Credit is a social relationship between a creditor (lender) and a borrower. A debtor agrees to return lender, frequently with interest, or face financial or legal repercussions. Credit is a practice that dates back to the beginning of human civilization, thousands of years ago.
Today, credit refers to an agreement to buy something with the explicit promise to pay for it later. This is referred to as credit purchase. Credit cards are currently the most popular way to make purchases on credit. The bank that issued the card repays the merchant in full and extends credit to the buyer, who may repay the bank over time while paying interest fees in the interim. This adds an intermediary to the credit agreement.
Types of Credit
Credit can take many different forms. Bank credit or financial credit is the most often used type. Car loans, mortgages, signature loans, and credit lines fall under this category of credit. In essence, when a bank lends money to a customer, it credits the borrower with funds that must be repaid at a later time.
Credit can also refer to a decrease in one’s debt in other circumstances. Consider a scenario where someone owes their credit card company ₦2,000 in total but only returns one ₦500 transaction to the merchant. The refund will be shown on the account as a credit, bringing the balance down to ₦1500.
As an illustration, when a customer uses a Visa card to make a purchase, the card is regarded as a type of credit because the customer is making a transaction with the idea that they will reimburse the bank later.
Credit may be extended in addition to financial resources. A postponed payment, which is another kind of credit, might be exchanged for goods and services.
Credit is a term used to describe situations where suppliers provide customers with goods or services but wait until later to request payment. When a restaurant accepts a truckload of food from a vendor who bills the restaurant a month later, the vendor is offering the restaurant a form of credit.