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{{short description|Financial term for the trust between parties in transactions with a deferred payment}}
{{other uses}}
[[File:Credit-cards.jpg|thumb|right|200px|A [[credit card]] is a common form of credit. With a credit card, the credit card company, often a [[bank]], grants a [[line of credit]] to the card holder. The card holder can make purchases from merchants, and borrow the money for these purchases from the credit card company.]]
[[File:2005private sector credit.PNG|thumb|right|px|Domestic credit to private sector in 2005]]
'''Credit''' (from [[Latin]] verb ''credit'', meaning "one believes") is the [[Trust (social sciences)|trust]] which allows one [[Party (law)|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.<ref>[http://www.merriam-webster.com/dictionary/credit ''Credit'' (def. 2c)]. ''Merriam Webster Online''. Retrieved 5 March 2015.</ref> The resources provided by the first party can be either property, fulfillment of promises, or performances.<ref>{{cite book |last1=Chorafas |first1=Dimitris N |title=The management of bond investments and trading of debt |date=2005 |publisher=Elsevier Butterworth-Heinemann |isbn=9780080497280 |page=xii |url=https://books.google.com/books?id=Cxm9r7215gwC |access-date=16 January 2023}}</ref> In other words, credit is a method of making [[Reciprocity (social and political philosophy)|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 and services|goods or services]] (e.g. consumer credit). Credit encompasses any form of deferred payment.<ref>{{cite book |last1=O'Sullivan |first1=Arthur |url=https://archive.org/details/isbn_9780131334878/page/512/mode/2up |title=Economics: Principles in Action |last2=Sheffrin |first2=Steven M. |publisher=Pearson Prentice Hall |year=2003 |isbn=0-13-063085-3 |location=Needham, Mass |page=512 |author-link1=Arthur O'Sullivan (economist) |author-link2=Steven M. Sheffrin |url-access=registration}}</ref> Credit is extended by a [[creditor]], also known as a [[lender]], to a [[debtor]], also known as a [[borrower]].
==Etymology==
The term "credit" was first used in English in the 1520s. The term came "from Middle French crédit (15c.) "belief, trust," from Italian credito, from Latin creditum "a loan, thing entrusted to another," from past participle of credere "to trust, entrust, believe". The commercial meaning of "credit" "was the original one in English (creditor is [from] mid-15c.)" The derivative expression "[[credit union]]" was first used in 1881 in American English; the expression "[[credit rating]]" was first used in 1958.<ref>{{cite web |url=http://www.etymonline.com/index.php?allowed_in_frame=0&search=credit |title=Credit |website=www.etymonline.com |publisher= Online Etymology Dictionary|access-date=17 May 2017}}</ref>
==History==
Credit cards became most prominent during the 1900s. Larger companies began creating chains with other companies and used a credit card 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 creating of credit cards on behalf of banks around the world.<ref>{{Cite web|url=https://www.britannica.com/topic/credit-card|title=Credit card|last=Tikkanen|first=Amy|website=Encyclopedia Britannica|language=en|access-date=2020-03-25}}</ref> Some other first bank-issued credit cards include [[Bank of America]]'s [[Bankamericard|Bank Americard]] in 1958 and [[American Express]]' American Express Card also in 1958. These worked similarly to the company-issued credit cards; however, they expanded purchasing power to almost any service and they allowed a consumer to accumulate [[revolving credit]]. Revolving credit was a means to pay off a balance at a later date while incurring a finance charge for the balance.<ref>{{Cite web|url=https://www.creditcards.com/credit-card-news/history-of-credit-cards.php|title=The history of credit cards (Timeline & major events)|date=12 August 2021|access-date=23 March 2020|archive-date=27 April 2020|archive-url=https://web.archive.org/web/20200427192730/https://www.creditcards.com/credit-card-news/history-of-credit-cards.php|url-status=dead}}</ref>
===Discrimination===
Until the [[Equal Credit Opportunity Act]] in 1974, women in America were given credit cards under stricter terms, or not at all. It could be hard for a woman to buy a house without a male co-signer. <ref>{{Cite web|url=https://www.smithsonianmag.com/smart-news/forty-years-ago-women-had-a-hard-time-getting-credit-cards-180949289/|title=Forty Years Ago, Women Had a Hard Time Getting Credit Cards}}</ref> In the past, even when not explicitly barred from them, people of color were often [[Redlining|unable to get credit]] to buy a house in white neighborhoods.
==Bank-issued credit==
Bank-issued credit makes up the largest proportion of credit in existence. The traditional view of banks as intermediaries between savers and borrowers is incorrect. Modern banking is about credit creation.<ref name="Money Creation in the Modern Economy">{{Cite web|url=https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf|title=Bank of England Quarterly Bulletin 2014 Q1 - Money Creation in the Modern Economy}}</ref> Credit is made up of two parts, the credit ([[money]]) and its corresponding [[debt]], which requires repayment with [[interest]]. The majority (97% as of December 2013<ref name="Money Creation in the Modern Economy" />) of the money in the UK economy is created as credit. When a bank issues credit (i.e. makes a loan), it writes a negative entry in to 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 credit-worthy individual. When the debt is fully repaid, the credit 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 credit 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{{explain|date=January 2021}}{{citation needed|date=January 2021}}. If a bank issues too much bad credit (those debtors who are unable to pay it back), the bank will become [[Insolvency|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 debt|unsecured]] (non-collateralized) credit such as consumer [[credit card]]s and small unsecured loans, and [[Secured loan|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 (finance)|default]]), banks will tend to issue large credit sums to those deemed credit-worthy, and also to require [[Collateral (finance)|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) credit agreements for automobile purchases.
Movements of [[financial capital]] are normally dependent on either credit or [[Capital stock|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. The purest form is the [[credit default swap]] market, which is essentially a traded market in credit insurance. A credit default swap represents the price at which two parties exchange this [[risk]]{{spaced ndash}}the protection ''seller'' takes the risk of default of the credit in return for a payment, commonly denoted in [[basis point]]s (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 (finance)|bond]] or other receivable), delivers this receivable to the protection seller and receives from the seller the paramount (that is, is made whole).{{citation needed|date=April 2020}}
==Types==
There are many types of credit, including but not limited to bank credit, [[commerce]], consumer credit, [[investment credit]], [[international credit]], and [[public credit]].
===Trade credit===
In commercial [[trade]], the term "[[trade credit]]" refers to the approval of delayed payment for purchased goods. Credit is sometimes not granted to a buyer who has financial instability or difficulty. Companies frequently offer trade credit to their customers as part of terms of a purchase agreement.  Organizations that offer credit to their customers frequently employ a [[credit manager]].
===Consumer credit===
{{section refimprove|date=February 2017}}
Consumer credit can be defined as "money, goods or services provided to an individual in the absence of immediate payment". Common forms of consumer credit include [[credit card]]s, store cards, motor vehicle finance, personal loans ([[Installment credit|installment loan]]s), [[Line of credit|consumer lines of credit]], [[payday loan]]s, retail loans (retail installment loans) and [[Mortgage loan|mortgages]]. This is a broad definition of consumer credit 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 credit, such as the one adopted by the [[Federal Reserve|U.S. Federal Reserve]].<ref>{{Cite book|url=https://books.google.com/books?id=wacM4zKAIe4C&q=residential+mortgages+are+excluded+from+some+definitions+of+consumer+credit&pg=PA106|title=STRATEGIC CREDIT MANAGEMENT IN BANKS|last1=POPLI|first1=G. S.|last2=PURI|first2=S. K.|date=2013-01-23|publisher=PHI Learning Pvt. Ltd.|isbn=9788120347045|language=en}}</ref>
The cost of credit 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, required by the lender as an integral part of the credit agreement. Other costs, such as those for [[payment protection insurance|credit insurance]], may be optional; the borrower chooses whether or not they are included as part of the agreement.
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).<ref>{{Cite book|url=https://books.google.com/books?id=JK2HDAAAQBAJ&q=lenders+are+required+to+quote+all+mandatory+charges+in+the+form+of+an+annual+percentage+rate&pg=PA13|title=Consumer Credit Fundamentals|last=Finlay|first=S.|date=2009-02-02|publisher=Springer|isbn=9780230232792|language=en}}</ref> 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.<ref>{{Cite book|title = Consumer Credit Fundamentals|last = Finlay|first = S.|publisher = Palgrave Macmillan|year = 2009|edition = 2nd}}</ref>
Interest rates on loans to consumers, whether mortgages or credit cards are most commonly determined with reference to a [[credit score]]. Calculated by private credit rating agencies or centralized [[credit bureau]]s based on factors such as prior defaults, [[Credit history|payment history]], and available credit, individuals with higher credit scores have access to lower APRs than those with lower scores.<ref>{{cite web |title=What are FICO Scores and How Do They Affect US Consumer Credit? |url=https://finexasia.com/en/blog/what-are-fico-scores-and-how-do-they-affect-u-s-consumer-credit/ |website=FinEX Asia |date=12 November 2017 |access-date=8 August 2018}}</ref>
===Statistics===
{| class="wikitable"
|+ Share of consumer credit as a ratio of total [[household debt]] in 2015<ref>{{cite journal |last1=Comelli |first1=Martino |title=The impact of welfare on household debt |journal=Sociological Spectrum |date=25 February 2021 |volume=41 |issue=2 |pages=154–176 |doi=10.1080/02732173.2021.1875088 |doi-access= |s2cid=233128669 |hdl=20.500.14018/13843 |hdl-access=free }}</ref>
! {{flag|Switzerland}}
! {{flag|Netherlands}}
! {{flag|Luxembourg}}
! {{flag|Denmark}}
! {{flag|Sweden}}
! {{flag|Japan}}
! {{flag|Latvia}}
! {{flag|Spain}}
! {{flag|Lithuania}}
! {{flag|Estonia}}
! {{flag|Australia}}
! {{flag|Portugal}}
! {{flag|Germany}}
! {{flag|United Kingdom}}
|+
| 1%
| 4%
| 5%
| 5%
| 5%
| 7%
| 8%
| 9%
| 9%
| 9%
| 9%
| 10%
| 12%
| 12%
|+
! {{flag|Finland}}
! {{flag|Ireland}}
! {{flag|Austria}}
! {{flag|France}}
! {{flag|Belgium}}
! {{flag|Czechia}}
! {{flag|Italy}}
! {{flag|Slovakia}}
! {{flag|United States}}
! {{flag|Slovenia}}
! {{flag|Greece}}
! {{flag|Poland}}
! {{flag|Canada}}
! {{flag|Hungary}}
|+
| 12%
| 12%
| 13%
| 14%
| 14%
| 16%
| 16%
| 19%
| 23%
| 23%
| 27%
| 29%
| 29%
| 44%
|}
==See also==
{{columns-list|colwidth=30em|
* [[Commercial credit reporting]]
* [[Credit risk]]
* [[Credit theory of money]]
* [[Debits and credits]]
* [[Financial literacy]]
* [[Mutual credit]]
* [[Peer-to-peer lending]]
* [[Accounts receivables]]
* [[Settlement (finance)]]
* [[Social credit]]
* [[Standard of deferred payment]]
* [[Subprime lending]]
}}
==Notes==
{{reflist}}
==References==
* Logemann, Jan, ed. (2012). ''The Development of Consumer Credit in Global Perspective: Business, Regulation, and Culture''. New York: Palgrave Macmillan. {{ISBN|978-0-230-34105-0}}.
==External links==
*{{commons category-inline}}
*{{wikiquote-inline}}
{{Debt}}
{{Authority control}}
[[Category:Credit| ]]
[[Category:Debt]]