Credit

Credit is a contract in which a borrower receives something of value now and agrees to repay the lender at a later date, typically with interest. It covers loans, credit cards, lines of credit, and trade credit between businesses. The terms include principal, interest rate, fees, and repayment schedule. Interest rates may be fixed or variable, and the annual percentage rate (APR) conveys the overall cost of borrowing.

Creditworthiness is evaluated by lenders using credit history, income, debt level, and collateral. Credit reports from credit bureaus summarize payment history and outstanding obligations, which influence the borrower’s credit score. Common scoring models weigh payment history, amounts owed, length of credit history, new credit, and types of credit used. Higher scores generally improve access to favorable terms, while missed payments and high credit utilization can lower scores.

The use of credit enables consumption, household finance, and business liquidity, but carries risks of over-indebtedness. Responsible borrowing involves understanding terms, comparing offers, budgeting, and ensuring affordable repayments. Lenders typically perform affordability checks and may require collateral or co-signers. Regulation varies by jurisdiction but often includes disclosure requirements, consumer protection provisions, privacy rules, and caps on certain charges. Financial institutions may also securitize credit or offer insured products.

Economically, credit helps smooth consumption, finance investment, and aid monetary policy transmission, but it can contribute to instability if risk is mispriced or leverage becomes excessive. Credit systems have evolved from informal arrangements to modern formal networks led by banks, retailers, and specialized lenders. Access to credit remains uneven across populations and is the subject of ongoing policy debates about protection and financial inclusion.