In finance, credit (as in the term "credit card") is the
granting of a loan and the creation of debt. Any movement of financial capital
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, 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).
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