Credit and debt

Reviewed by Apoorva | Updated on Sep 30, 2020

Introduction

Credit is a term with many meanings in the financial world. Generally, it is defined as a contract entered by two parties in which a borrower receives something of value now and agrees to repay the lender at a later date, with interest. On the other hand, debt is an amount of money borrowed by one party from another. Debt is used by many corporations and individuals as a method of making large purchases that they could not afford under normal circumstances.

What is Credit and Debt?

Credit cards are the most common form of buying on credit. People tend to make purchases with credit cards because they may not have enough cash at hand. Accepting credit cards is a way to increase sales at retailers or between businesses.

On the other hand, a debt arrangement allows the borrowing party to borrow money under the condition that it is to be paid back at a later date, usually with interest. The most common forms of debt are loans, such as home loans, car loans, and credit card debt.

According to the terms of a loan, the borrower is supposed to repay the balance of the loan by a certain date every month within a certain number of years. The terms of the loan also specifies the amount of interest that the borrower is required to pay annually mostly expressed as a percentage of the loan amount.

Why is Credit and Debt important?

Financial resources are not the only form of credit that may be offered. There may be an exchange of goods and services in exchange for a deferred payment. When suppliers give products or services to an individual but don't require payment until later, that is a form of credit.

For example, a dentist may get the apparatus for his clinic on credit. He may not have to pay the entire cost at the time of purchase but, he would start repayments on equal monthly instalments to settle up the credit.

Tips and tricks for gaining maximum benefits

Credit, in another case, refers to the credit history or creditworthiness of an individual or company. The best trick to get more credit is to have a good credit history and credit score. From a companys perspective, credit refers to an accounting entry that either decreases assets or increases liabilities and equity on its balance sheet.

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