What is the fundamental definition of credit?

Credit is defined as the trust that allows one party to provide money or resources to another party with the understanding that reimbursement will occur at a later date, thereby creating a debt. This trust enables reciprocity to be formalized and legally enforceable among unrelated individuals.

What types of resources can be provided through credit?

The resources provided through credit can encompass financial assets, such as money in the form of a loan, or tangible goods and services. Essentially, credit facilitates any transaction involving a deferred payment.

Who are the parties involved in a credit transaction?

In a credit transaction, the party providing the resources is known as the creditor or lender, while the party receiving the resources and promising future repayment is the debtor or borrower.

What is the origin of the word 'credit'?

The term 'credit' entered the English language in the 1520s, originating from the Middle French word 'crédit', meaning belief or trust. This, in turn, came from the Italian 'credito' and ultimately the Latin 'creditum', which meant a loan or something entrusted to another, derived from the verb 'credere', meaning to trust, entrust, or believe.

When was the commercial meaning of 'credit' first used in English?

The commercial meaning of 'credit' was the original one in English, with the term 'creditor' being used as early as the mid-15th century.

How was credit utilized in 19th-century agrarian communities?

In the 19th century, general stores in farming communities often provided store credit. Farmers would purchase goods throughout the year on credit and settle their debts after selling their crops at harvest time.

How did credit cards evolve in the 20th century?

Credit cards became prominent in the 1900s when larger companies started forming chains and used credit cards for payments within these networks. These companies charged cardholders an annual fee and a percentage of billings from participating merchants, which eventually led to banks issuing their own credit cards.

What were some early examples of bank-issued credit cards?

Notable early bank-issued credit cards included Bank of America's Bank Americard and American Express's American Express Card, both introduced in 1958. These cards expanded purchasing power and allowed consumers to accumulate revolving credit, which permitted balances to be paid off later with finance charges.

What significant legal change impacted credit access for women in America?

The Equal Credit Opportunity Act, passed in 1974, was a significant legal change that addressed the historical discrimination against women in accessing credit. Prior to this act, women often faced stricter terms or were denied credit cards, and frequently required a male co-signer to purchase a house.

What historical barriers did people of color face in obtaining credit?

Historically, even without explicit bans, people of color were often unable to obtain credit for purchasing homes, particularly in predominantly white neighborhoods, due to practices like redlining.

What is the traditional view of banks' role in the economy, and how is it inaccurate?

The traditional view sees banks primarily as intermediaries connecting savers and borrowers. However, this is inaccurate because modern banking is fundamentally about credit creation, where banks generate money through lending.

How do banks create credit and money?

When a bank issues credit, such as making a loan, it records a negative entry in its liabilities and an equivalent positive figure in its assets, representing the loan repayment stream. The majority of money in economies like the UK is created this way, with the credit and corresponding debt being canceled upon full repayment, effectively removing the money from circulation.

What is the role of interest in bank-created credit?

Interest is a key component of the debt associated with bank-created credit. Borrowers must repay the principal amount borrowed plus interest, which is the cost of using the borrowed funds.

What percentage of the UK economy's money is created as credit?

As of December 2013, the majority, specifically 97%, of the money in the UK economy was created as credit.

Where does most of the credit created by banks go?

Most of the credit created by banks is used for the purchase of land and property, which contributes to inflation in these markets and is a significant driver of the economic cycle.

What are the two main forms of private credit created by banks?

The two main forms are unsecured credit, such as consumer credit cards and small personal loans that do not require collateral, and secured credit, which is backed by collateral like a house or car, reducing the bank's risk of default.

How do banks mitigate the risk of credit default?

Banks mitigate the risk of not recovering their money by issuing larger credit sums to individuals or entities deemed credit-worthy and by requiring collateral. Collateral is an asset of equivalent value to the loan that the bank can claim if the debtor fails to meet repayment terms.

What is trade credit?

Trade credit refers to the practice in commercial trade where a buyer is approved for delayed payment for goods purchased. Companies often offer this as part of a purchase agreement, and they may employ a credit manager to oversee these arrangements.

What is consumer credit?

Consumer credit is broadly defined as the provision of money, goods, or services to an individual without immediate payment. Common examples include credit cards, store cards, personal loans, and mortgages.

Are residential mortgages always considered consumer credit?

While mortgages are a form of personal borrowing, their large market size leads some observers to classify them separately from consumer credit. For instance, the U.S. Federal Reserve excludes residential mortgages from its definition of consumer credit.

What constitutes the cost of credit for a borrower?

The cost of credit includes not only the principal amount borrowed but also additional charges such as interest, arrangement fees, and other mandatory fees required by the lender. Optional costs, like credit insurance, may also be included if chosen by the borrower.

What is the purpose of the Annual Percentage Rate (APR)?

The Annual Percentage Rate (APR) is a standardized way lenders are often required to present the mandatory charges associated with credit. Its goal is to promote 'truth in lending' by providing borrowers with a clear measure of the total cost of borrowing, enabling comparison between different credit products.

How are interest rates on consumer loans typically determined?

Interest rates on loans to consumers, including mortgages and credit cards, are most commonly determined by a credit score. This score is calculated by credit rating agencies or bureaus based on factors like payment history and prior defaults.

How do credit scores influence borrowing costs?

Individuals with higher credit scores generally have access to lower Annual Percentage Rates (APRs) on loans compared to those with lower scores. This is because a higher score indicates a lower perceived risk of default to the lender.

What information is used to calculate a credit score?

Credit scores are calculated by private credit rating agencies or centralized credit bureaus using data such as an individual's prior defaults, payment history, and the amount of available credit they utilize.

What does the provided table show regarding consumer credit in 2015?

The table presents data from 2015 on the share of consumer credit as a ratio of total household debt across various countries. For example, Switzerland had 1% consumer credit as a ratio of household debt, while Hungary had 44%.

Which countries had the lowest share of consumer credit relative to household debt in 2015, according to the table?

According to the 2015 data presented, Switzerland had the lowest share of consumer credit as a ratio of total household debt at 1%, followed by the Netherlands at 4%.

Which countries had the highest share of consumer credit relative to household debt in 2015, according to the table?

Based on the 2015 statistics provided, Hungary had the highest share of consumer credit as a ratio of total household debt at 44%, followed by Greece and Poland, both at 29%.

What is the relationship between credit and financial capital movements?

Movements of financial capital are typically dependent on either credit or equity transfers. The global credit market is notably larger than the global equity market, being approximately three times its size.

What is a credit default swap?

A credit default swap is a financial instrument that represents a traded market for credit insurance. It involves two parties exchanging risk: a protection seller takes on the risk of default in exchange for a payment, while the protection buyer pays this premium and receives compensation if the underlying credit defaults.

What are some of the listed types of credit?

The article mentions several types of credit, including bank credit, commerce credit, consumer credit, investment credit, international credit, and public credit. Trade credit and specific forms like consumer credit are further detailed.

What is the significance of the 'See also' section in the article?

The 'See also' section lists related topics that may be of interest to the reader, such as commercial credit reporting, credit risk, credit theory of money, debits and credits, financial literacy, mutual credit, peer-to-peer lending, accounts receivables, settlement, social credit, the standard of deferred payment, and subprime lending.

What does the image of credit cards illustrate?

The image of credit cards serves to visually represent a common form of credit. It depicts how credit card companies, often banks, grant lines of credit to cardholders, enabling them to make purchases by borrowing funds from the company.

What does the graphic titled 'Domestic credit to private sector in 2005' represent?

The graphic titled 'Domestic credit to private sector in 2005' provides a visual representation of the amount of credit extended to the private sector within a country during that specific year.

What is the role of a credit manager within a company?

A credit manager is a professional employed by organizations that offer credit to their customers. Their role typically involves overseeing the process of granting and managing credit to ensure timely repayment and minimize risk.

What is revolving credit?

Revolving credit is a type of credit arrangement, often associated with credit cards, that allows a borrower to pay off a balance over time. This flexibility comes with the condition of incurring finance charges on the outstanding balance.

What is the relationship between creditworthiness and financial capital movements?

The movement of financial capital is dependent on the creditworthiness, or reputation for repaying debts, of the entity taking responsibility for the funds. Entities with higher creditworthiness are more likely to secure credit.

How is the cost of credit, specifically interest and charges, often standardized for consumers?

Under many legal frameworks, lenders are required to express the mandatory costs of credit, including interest and fees, as an Annual Percentage Rate (APR). This standardized rate helps consumers understand and compare the true cost of borrowing across different loan products.

What is the purpose of the 'Authority control' section at the end of the article?

The 'Authority control' section provides links to external databases that catalog and manage information about the subject, 'Credit'. This helps in identifying and organizing related resources across different library and archival systems, such as GND, Library of Congress, BnF, and others.

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The Fundamental Concept of Credit

Trust as the Bedrock

Credit is fundamentally an arrangement built upon trust, enabling one party to provide financial resources or other assets to another with the understanding that reimbursement will occur at a future date. This establishes a debt, creating a formal, legally enforceable mechanism for reciprocity that extends beyond immediate exchanges.

Deferred Exchange

The core of credit involves the provision of resources—be it money, goods, or services—without immediate compensation. The receiving party commits to returning equivalent value or making payment at a later time, thereby facilitating transactions that are not constrained by immediate liquidity.

Formalizing Reciprocity

Credit transforms informal promises into legally binding obligations. It allows for complex economic interactions among unrelated parties, underpinning much of modern commerce by providing a framework for deferred payment and future obligations.

Etymological Roots

From Latin to English

The term "credit" originates from the Latin verb credit, meaning "one believes" or "entrusts." Its earliest usage in English, dating back to the 1520s, directly reflects this etymological foundation, emphasizing the element of belief and trust inherent in the concept.

Evolution of Usage

Initially, the term "credit" in English primarily referred to its commercial meaning—the extension of trust in financial transactions. Over time, related expressions like "credit union" (emerging in the 19th century) and "credit rating" (popularized in the mid-20th century) further defined its scope within financial systems.

Historical Trajectory of Credit

Agrarian Roots

In the 19th century, general stores in agrarian societies commonly operated on a credit system. Farmers would purchase goods throughout the year on credit, settling their accounts at harvest time after selling their crops, demonstrating an early form of deferred payment tied to agricultural cycles.

The Rise of Credit Cards

The 20th century witnessed the significant emergence of credit cards. Initially adopted by larger companies for inter-company payments, the concept evolved with banks like Bank of America (BankAmericard, 1958) and American Express (1958) issuing cards. These innovations expanded purchasing power and introduced revolving credit, allowing consumers to carry balances with associated finance charges.

Historical Discrimination in Credit Access

Barriers for Women

Prior to the Equal Credit Opportunity Act of 1974 in the United States, women faced significant hurdles in accessing credit. They were often subjected to stricter terms or denied credit cards outright, frequently requiring a male co-signer, particularly for major financial decisions like purchasing a home.

Systemic Inequities

Historically, individuals from minority ethnic groups were often denied credit, especially for housing in predominantly white neighborhoods, through practices such as redlining. These systemic inequities limited wealth accumulation and perpetuated social disparities.

Credit Creation in Modern Banking

Beyond Intermediation

Contemporary banking operates significantly through credit creation, rather than solely acting as intermediaries between savers and borrowers. When a bank issues credit, it essentially generates new money by creating corresponding assets (loan repayment streams) and liabilities on its balance sheet.

The Mechanics of Credit

Credit comprises both the money lent and the debt incurred, necessitating repayment with interest. The majority of money in economies like the UK is created as credit. This process, particularly when directed towards asset purchases like real estate, can significantly influence market inflation and the economic cycle.

Secured vs. Unsecured Credit

Banks extend credit in two primary forms: unsecured (e.g., credit cards, personal loans) and secured (e.g., mortgages, auto loans). To mitigate default risk, lenders often require collateral—assets that can be seized if repayment fails—and assess borrowers' creditworthiness through credit scores and history.

Diverse Forms of Credit

Commercial and Public Credit

Credit encompasses a broad spectrum, including bank credit, commercial transactions, investment credit, international credit, and public credit extended by governments. Each form serves distinct economic functions and operates under specific regulatory frameworks.

Trade Credit

Within commerce, "trade credit" refers to the practice of allowing customers to defer payment for goods or services. This is a common business practice, often managed by credit departments, and is typically contingent upon the buyer's financial stability and creditworthiness.

Classification and Measurement

The share of consumer credit relative to total household debt varies significantly across nations, reflecting diverse economic structures and consumer behaviors. These statistics are crucial for understanding national financial health and economic trends.

Consumer Credit Dynamics

Forms and Costs

Consumer credit includes a wide array of financial products such as credit cards, personal loans, mortgages, and payday loans. The cost of credit is determined by interest rates, fees, and other charges, often standardized through the Annual Percentage Rate (APR) to ensure transparency and comparability among lenders.

Credit Scores and Risk

Interest rates for consumers are heavily influenced by their credit scores, which are calculated by credit bureaus based on payment history, prior defaults, and credit utilization. Higher credit scores generally correlate with lower APRs, reflecting reduced perceived risk for the lender.

Mortgages and Definitions

While often categorized under consumer credit, residential mortgages are sometimes treated as a distinct borrowing class due to their substantial value and long-term nature. Definitions can vary, with some regulatory bodies excluding mortgages from standard consumer credit metrics.

Comparative Consumer Credit Ratios

International Benchmarks

The proportion of consumer credit within total household debt provides insight into national financial landscapes. The following table illustrates these ratios for various countries in 2015, highlighting significant international variations.

Share of consumer credit as a ratio of total household debt in 2015
Switzerland	Netherlands	Luxembourg	Denmark	Sweden	Japan	Latvia	Spain	Lithuania	Estonia	Australia	Portugal	Germany	United Kingdom
1%	4%	5%	5%	5%	7%	8%	9%	9%	9%	9%	10%	12%	12%
Finland	Ireland	Austria	France	Belgium	Czechia	Italy	Slovakia	United States	Slovenia	Greece	Poland	Canada	Hungary
12%	12%	13%	14%	14%	16%	16%	19%	23%	23%	27%	29%	29%	44%

Related Concepts

Key Areas of Study

The study of credit intersects with numerous financial and economic disciplines. Understanding credit requires familiarity with related concepts such as:

Commercial credit reporting
Credit risk assessment
Theories of money creation
Debits and credits in accounting
Financial literacy and education
Mutual credit systems
Peer-to-peer lending platforms
Accounts receivable management
Financial settlement processes
Social credit systems
The role of deferred payment standards
Subprime lending practices

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References

Credit (def. 2c). Merriam Webster Online. Retrieved 5 March 2015.

A full list of references for this article are available at the Credit Wikipedia page

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This document has been generated by an Artificial Intelligence model for educational and informational purposes. The content is derived from a specific snapshot of publicly available data and has been refined for clarity and academic rigor. While efforts have been made to ensure accuracy and comprehensiveness, it may not encompass all nuances or the most current developments in the field.

This is not financial advice. The information presented herein is intended for academic study and should not be construed as professional financial counsel. Readers are strongly advised to consult with qualified financial professionals for personalized advice regarding their specific financial circumstances. Reliance on any information provided in this document is solely at the user's own risk.

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The Architecture of Trust

💡 Dive in with Flashcard Learning! 💡

The Fundamental Concept of Credit 🤝

💡 Trust as the Bedrock

🔄 Deferred Exchange

⚖️ Formalizing Reciprocity

Etymological Roots 📜

🗣️ From Latin to English

📈 Evolution of Usage

Historical Trajectory of Credit ⏳

🏪 Agrarian Roots

💳 The Rise of Credit Cards

Historical Discrimination in Credit Access ⚖️

🚫 Barriers for Women

🏘️ Systemic Inequities

Credit Creation in Modern Banking 🏦

💸 Beyond Intermediation

📈 The Mechanics of Credit

🛡️ Secured vs. Unsecured Credit

Diverse Forms of Credit 🗂️

💼 Commercial and Public Credit

🤝 Trade Credit

📊 Classification and Measurement

Consumer Credit Dynamics 🛒

💳 Forms and Costs

⭐ Credit Scores and Risk

🏠 Mortgages and Definitions

Comparative Consumer Credit Ratios 📊

📈 International Benchmarks

Related Concepts 🔗

📚 Key Areas of Study

Teacher's Corner 🧑‍🏫

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References

📜 References

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📜 Important Notice for Learners

Dive in with Flashcard Learning!

The Fundamental Concept of Credit

Trust as the Bedrock

Deferred Exchange

Formalizing Reciprocity

Etymological Roots

From Latin to English

Evolution of Usage

Historical Trajectory of Credit

Agrarian Roots

The Rise of Credit Cards

Historical Discrimination in Credit Access

Barriers for Women

Systemic Inequities

Credit Creation in Modern Banking

Beyond Intermediation

The Mechanics of Credit

Secured vs. Unsecured Credit

Diverse Forms of Credit

Commercial and Public Credit

Trade Credit

Classification and Measurement

Consumer Credit Dynamics

Forms and Costs

Credit Scores and Risk

Mortgages and Definitions

Comparative Consumer Credit Ratios

International Benchmarks

Related Concepts

Key Areas of Study

Teacher's Corner

True or False?

Test Your Knowledge!

Gamer's Corner

Discover other topics to study!

References

Feedback & Support

Academic Disclaimer

Important Notice for Learners