The word 'credit' is derived from the Latin word credo meaning 'I believe'. The basis of credit is trust and confidence. Credit granting the possession of goods and services without immediate payment. Credit enables the producers for investors to bridge the gap between production and sale of output.
Samuelson and Nordhaus defined credit as " In monetary theory, the use of some else pounds in exchange for a promise to pay (usually with interest) at a later date."
Similarly, the Penguin Dictionary of Economics defines credit as" Granting the use or possession of goods and services without immediate payment."
Credit is the act of granting permission or something to a person without immediate payment. It is the act of giving money property or other materials goods to another party in exchange for future repayment of the principal amount along with the interest or other financial charges.
Types of credit
a. Consumer credit: Credit formally or informal extended by shopkeepers, Financial Institutions, and others to the ordinary public the purchase of consumer goods is called consumer credit.
b. Trade credit: Credit extended to manufacturing industries services and Commerce is called trade credit.
c. Bank credit: Credit consisting of loans and overdrafts to banks customers is the bank credit.
Factors determining the creditworthiness of a debtor
Lenders especially bankers use a formula known as the six C's of credit when evaluating the creditworthiness of a debtor.
a. Character: This is essentially a summary of the individual. Creditors look for people who appear to be trustworthy and reliable, and who are willing and able to meet their financial obligations.
b. Capacity: This is the individual's ability to repay the loan; it is based on present and anticipated earnings balance against extreme debts.
c. Collateral: The item pledged by the borrower security for the loan, which may be real estate, stocks, saving a mortgage, etc.
d. Conditions: Both regulatory and economic conditions are considered. Condition apply to the landers individual circumstance; for example when banks are not lending in specific areas. Economic conditions determined the lander's general policy towards loans.
e. Credit history: It refers to the individual's credit history. An individual's history of authenticity and financial prudence determine the creditworthiness of a person.
f. Capital: It is the net worth of an individual as indicated by a personal financial statement.
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