What is the Credit Meaning?

Credit vs. Loan

Credit

Credit is the ability to purchase or borrow money, products, or services. It also refers to one’s credit rating which gives the borrower the privilege of applying for a loan or any financial products. The higher the credit rating, the higher the amount of loan that will be granted to a borrower and the better the terms. 

In essence, a loan is a sub-feature of credit, something that an individual holding a high credit score can take advantage of. Another feature of credit is that it can be revolving, open-ended, and you can repeatedly apply for a loan. After repayment, borrowers are allowed to re-apply for a loan. 

The most common example of credit is the use of credit cards. 

Loan

The loan is the sum of money that borrowers are approved of from any financial institution. A loan is a debt that is incurred for monetary consideration and is finalized with an agreement where a borrower agrees to pay the principal amount plus any interest over a period of time-based on the repayment terms. 

Two Types of Credit Transactions

Secured Transactions

Credit transactions that acquire security in the form of collateral, maybe real (mortgage) or personal (pledge) property. 

Unsecured Transactions 

There is no collateral involved, the approval of the loan only relies on the creditworthiness of a borrower, with a promise to pay the same in the future.

Advantage and Disadvantage of Entering Into Credit Transactions

Advantage to Individuals

If you need to buy your basic necessities but you have run out of budget, one of the best options is to enter into a credit transaction. If you have a credit card, you can use it to buy for your needs while waiting for your next paycheck to come, or if there are emergency needs that should be taken care of right away. 

An advantage to Business Enterprise

When businesses are granted a credit line by their vendors and their bank, they do not have to immediately pay for any of their purchases for the company. Some businesses are granted 30 days by their vendors to settle their invoices, or their banks will be able to grant them a revolving credit line which they can access whenever they need to address an important business need. 

Disadvantages of Credit Transactions

Using credit comes with a cost and few disadvantages include the following:

• Higher interest rate

• Individuals who hold a high credit limit might get tempted to max out or purchase unnecessary items which can greatly affect their capacity to pay and have a negative impact on their credit rating. 

Different Types of Credit

Revolving Credit

This type of credit is called revolving credit because you are able to use it repeatedly as long as you have not yet capped its limit and you are able to pay the amount due on a regular basis. 

Installment Credit

A specific type of credit transaction that has a fixed monthly payment for a specified period. It is similar to a contract of loan, of which there is an extinguishment of the obligation after the debt is settled and paid in full. 

Open Credit

An Open Credit contains both the characteristics of Revolving Credit and Installment Credit. It also comes with a maximum limit but the amount varies depending on the manner of spending.  The payment requirement is also stipulated monthly which is similar to an installment credit but must also be settled in full in the next billing period.

Difference of Cash Transaction and Credit Transaction

A cash transaction is an immediate payment of the purchased goods, properties, or services whereas a credit transaction is the payment of purchased goods, properties, or services at a later time. 

Conclusion

Credit is a way for individuals and businesses to have access to cash that they do not have yet. It allows them to address their needs right away instead of waiting for them to have the cash in their bank accounts or hand. By having access to credit, they are able to act on their goals right away and not miss any opportunities.