What does credit mean in banking terms?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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In banking terms, “credit” means something like “the amount of money that a bank is willing to lend to a given individual.”  If I have X amount of credit at a bank, they are willing to lend me X dollars.

One way to think about this is to realize that “credit” comes from a Latin word meaning “I believe.”  When a bank grants you credit, they are saying that they believe in you.  Because they believe in you, they are willing to give you money right now without getting anything in return.  They believe that you will pay them back in the future.  When a bank believes this about a person or a company, the bank is willing to lend them money.  When this happens, we say that the person or the company has credit at that bank.

This term is also sometimes used to refer to the overall amounts of money that banks are willing to lend.  For example, we talk about how the availability of credit dropped dramatically during the 2007-2008 financial crisis.  This means that banks were much less willing to lend money to anyone.

So, “credit” refers to the ability of an individual to borrow money, but it can also refer to the overall amount of money that banks are willing to lend to all borrowers. 

sid-sarfraz's profile pic

sid-sarfraz | Student, Graduate | (Level 2) Salutatorian

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DEFINITION OF 'CREDIT'

1. 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.

INVESTOPEDIA EXPLAINS '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). 

malkaam's profile pic

malkaam | Student, Undergraduate | (Level 1) Valedictorian

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Credit is defined as

“The ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.”

In banking terms credit is used for providing finance to a party which is to be returned on some future date including the amount of interest, in most cases.

You can also consider credit as a loan provided by the bank to a customer, there are various instruments used to provide credit such as loan, credit card, Qarz-e-Hasna (Islamic banking-does not include interest).

Apart from this credit can also be defined as (when in relation to accounting):

“An entry recording a sum received, listed on the right-hand side or column of an account.”

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