Introduction

Credit is the provision of resources such as granting a loan by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. The first party is called a creditor also known as a lender, while the second party is called a debtor, also known as a borrower.

Any movement of monies or funds is normally quite dependent on credit, which in turn is dependent on the reputation or creditworthiness of the entity which takes responsibility for the funds.

The term credit is used similarly in commercial trade, known as "trade credit", to refer to the approval for delayed payments for purchased goods. Sometimes, credit is not granted to a person who has financial instability or difficulty. Companies frequently offer credit to their customers as part of the terms of a purchase agreement. Organizations that offer credit to their customers frequently employ a credit manager.

Credit is denominated by a unit of account. Unlike money (by a strict definition), credit itself cannot act as a unit of account. However, many forms of credit can readily act as a medium of exchange. As such, various forms of credit are frequently referred to as money and are included in estimates of the money supply.

Credit is also traded in the market. 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 – the protection "seller" takes the risk of default of the credit in return for a payment, commonly denoted in basis points (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 or other receivable), delivers this receivable to the protection seller and receives from the seller the par amount (that is, is made whole).

Table of Contents

1. What Does it Mean?
2. Leveraged Strategies
3. What is Adverse Credit?
4. What are Some of the Consequences of Bad Credit?
5. Person-to-Person Lending
6. TIPS!

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