Your Personal Financial Mentor informs that in finance, the basic definition of credit revolves around mutual trust. Credit is defined as the trust which allows one person or party to give another party some goods or services of value, with a promise of payment at a later date. Essentially, this definition means that credit is actually debt, which is quite true. Modern finance has changed this outlook a little. Nowadays credit more or less can be defined as a person’s worth. In simple terms, when your credit is good, it means you are worth some good money and you can carry on with your life comfortably. When you have financial issues then we say your credit is bad. Well, what this actually means is that you are broke.
Accountants view credits as an entity that either increases the liabilities of a company or decreases the assets. For example if a payment is due to be made to the company by a debtor, then this is entered on the balance sheet as a credit. Therefore, on a company’s balance sheet, a credit is supposed to increase the net income of the company, while a debit will reduce the income. But this is only within the period that is covered by the balance sheet.
But many of us are familiar with the term credit from a totally different perspective. For a majority of people, the word credit is usually associated with a credit card. From this perspective, credit refers to the amount of money that is available to be borrowed from your financial institution, knowing that this money is expected to be paid back within a given period. Whenever you use your credit card for shopping, fuel or any other purpose, the money you get is usually considered a debt to you, and is deducted from your income. From this perspective, credit is much like a loan.
A person’s credit score refers to the person’s perceived worth, usually based on the person’s credit history. Credit history has become a very important concept for the society. Actually credit history refers to the chronicles of how someone has been handling their debts within a certain period of time. Whenever you pay for your credit card or loans and mortgages, it is indicated in your credit history, and financial institutions use the history to determine your worth. It is therefore important to pay your bills and loans on time in order to maintain a good credit score.