Understanding Credit: Types and Usage in Finance

The word credit comes from the Latin credititus (substantivation of the verb credere: to believe), which means "trusting thing." Originally, "credit" meant, among other things, trust or confidence.

Credit can be considered the right of an individual creditor to receive from another debtor an amount in cash, among other things. It is generally a wealth exchange, present for future, based on the trust and credit that is granted to the debtor.

According to some economists, credit is a kind of exchange that operates in time instead of acting in space. It can be defined as "the exchange of current wealth for future wealth." Thus, if a miller sells 100 sacks of wheat to a baker, on 90-day terms, it means he is confident that, on the arrival date of that period, the debt will be canceled. In this case, we say that the debt has been "on credit, to run."

In economic and financial terms, credit, therefore, means the trust in the ability to meet, the possibility, will, and solvency of an individual, as regards the fulfillment of an obligation.

Revolving Credit

Credit card customers may have different ways to pay online using their credit. It will generally be in installments or revolving type. Customers with revolving mode can make a payment less than the total turnover in the period (called the Minimum Payment). The balance (the difference between the billed and paid) generates a new debt (revolving) that is applied to the current interest rate for the period and is added to the outstanding debt of this type, corresponding to previous periods, if any. This debt can be repaid (amortized) by the customer on a deferred basis over time.

Types of Credit

• Traditional Credit: A loan that includes a down payment and a number of installments to be arranged. Typically, these fees include insurance for any involuntary loss.
• Consumer Credit: A loan for a short or medium term (1 to 4 years) used to purchase goods or to cover utilities.
• Trade Credit: A loan made to companies of indistinct size for the procurement of goods, payment for services of the company, or to refinance debts to other institutions and short-term suppliers.
• Mortgage Credit: Money that the bank or financial institution delivers to buy a property already constructed, land, housing, offices, and other real estate, secured by the mortgage on the property acquired or constructed. Typically it is agreed to be paid in the medium or long term (8 to 40 years; usually 20 years).
• Consolidated Credit: A loan that adds all the other loans you have in progress into a single new loan. Reunifying all of your loans allows you to lower the interest rate on short-term loans.