The word CREDIT came from the Latin word “creditum” or “credere” which means trust.

Credit defined as the ability to acquire something of value, such as goods, services,
securities or money, at the present time to return for a promise to pay at some future
time.
 
The term CREDIT refers to the power of the prospective debtor rather than that of the
creditor, although that power will only be realized if the debtor as recommended by the
creditor.
 *When a credit agreement is consummated, the amount involved will be recorded as
asset on the balance sheet of the creditor and as liability on the balance sheet of the
debtor.
There are two parties involved in any credit transaction:
 Creditor who provides the thing borrowed
 Debtor who receives it and assumes obligation to pay
*The most important and biggest credit transactions are those which involve the use of
money.
Whenever debt is mentioned, it also means credit. Debt and credit are simply the same
thing taken from two different points.
 
CREDIT DISTINGUISHED FROM DEBT
Credit refers to that power of a person to obtain goods, or services without the
requirement of paying for them immediately upon delivery. The credit power in the
hands of a person may or may not be used. When that power is used, the person who
used it is now obligated to pay a certain amount of money at a stipulated date. That
amount or any remaining portion of the original amount is called DEBT.
Simply stated, credit refers to power, while debt refers to obligation. When credit is
availed of, the result is debt.
 
BASIC ELEMENTS OF CREDIT
1. Trust and Confidence – the essence of credit is confidence on the part of the
creditor. Motivated thus by his faith in his fellowmen, the creditor parts with
things of value in the expectation that he will be paid in the future.
2. Futurity – there is always a future time involved regardless of whether it is an
hour, a day, a month or even years.
3. Risk – the risk involved would be the uncertainty faced by the creditor, whether
he gets paid in full, in part or not at all. The degree of risk involved would be
 measured by the other factors. The risk could be minimized when the loan is
secured.
 
ADVANTAGES OF CREDIT
 Credit facilitates and contributes to the increase in wealth by making funds
available for productive purposes.
 Credit helps expand the purchasing power of every member of the business
community – from producer to the ultimate consumer.
 Credit enables immediate consumption of goods thereby providing for an
increase in material well-being.
 Credit helps expand economic opportunities through education, job training
and job creation.
 Credit spreads progress to various sectors of the economy.
 Credit makes possible the birth of new industry.
 Credit helps buying become more convenient for customers.
 Credit facilitates exchange
 Credit increases the volume of production
 Credit eliminates the risks involved in making payments to distant places.
 Credit economizes the use of coins and paper money.
 Credit eliminates the danger of being robbed of large amounts of money.
 Credit makes possible the accumulation of small savings and their
employment for productive purposes
DISADVANTAGES OF CREDIT
 Because of credit, many entrepreneurs’ resorts to over-expansion. Failure to
generate expected income can only cause a collapse which affects the nation’s
economy.
 Interest and operating expenses needed to be paid by debtor and risk of lending
what creditor has.
 Blowing your budget
 If you don’t make your payments on time, you’ll damage your credit record or
score – difficulty in getting more credit/loans in the future.
 A too liberal credit encourages extravagance.
 Credit sometimes increases business risks.
 Easy borrowing by the government has often led to the wasteful use of public
funds.
THE CREDIT CONTRACT
The agreement arrived at between the parties to a credit contract naturally originates
from credit transactions.
These may in turn arise in various ways, namely:
1. Purchase and sale of goods and services
 2. Borrowing money
3. The issuance of fiduciary money
 
In any transactions, the agreement between the lender and the borrower becomes
important. Such agreement, however, may be oral or in written form.
 
CHARACTERISTICS OF A CREDIT CONTRACT
1. It is bi-partite contract
In any credit transaction, there are two parties involved, the person giving away things
of value for the present, known as creditor, and the person receiving the things and
promising to pay in the future, known as debtor. Credit thus is viewed from two points.
2. It is a pecuniary contract
In the modern – day financial affairs, although the things are goods and services, the
payment is measured in terms of the monetary unit. Furthermore, the final settlement of
the transaction is also in terms of money.
3. It creates a legal obligation
The credit contract thus creates the right of the creditor to collect from the debtor. The
debtor in affect obtains possession and title to the things borrowed and therefore
obliges himself to pay. The creditor then acquires the debtor upon default of payment.
4. It has a fiduciary element
The credit is based on trust. It is therefore important that faith on the borrower’s ability
and willingness to pay exists. For instance, in the use of fiduciary money, faith on the
institution issuing it predicates its acceptance. Without such confidence, its acceptability
is either limited or entirely discarded.
5. It is based on personal factors
Since credit is inherent in the person, the contract is perfected based on the person’s
degree of moral as well as business competence. This is known as credit standing. It
might be recalled that the creditor accepts the debtor’s credit because he believes that
he is both willing and able to pay. The existence of the contract may protect the creditor
to the extent that this debtor’s ability to pay may be proven.