Credit

Credit can be defined as a trust, based on which a party provides various resource(s) to the other party wherein this second party intentionally or unintentionally does not reimburse the resource to that first party within the stipulated timeframe agreed upon at the time of the transfer of resource. However, the second party makes alternative arrangements to either pay repay or return the resources (or materials worth of equal value) at some other date later on. The resources mentioned in the above-mentioned definition can be financial (in case when loans are taken) or they may be in the form of goods or services (in case of consumer credits). Credits may include various forms of deferred payments.

Credit at times not necessarily includes money. The concept of credit can be considered appropriate in barter economies, based on direct exchange of goods & services. However, in modern economic backdrop credit is by and large denominated by unit of account. Unlike money, credit itself is unable to act as an effective account unit.

Movements that financial capital enjoys more or less depend upon either the credit or transfers of equity. Credit, on the other hand depends upon the creditworthiness or the reputation that is enjoyed by the very entity, on which the fate of the funds depends. Credit can also be traded in various financial markets, especially in the Credit Default Swap (CDS) market, which is the credit trading in its purest form. CDS signifies the particular price at which both the parties involved exchange this danger of being at the receiving end. Particularly, it is the protection "seller", who picks up the maximum risk credit default for a particular payment that is denoted in terms of basis points of the estimated amount that is set for reference. On the other hand, the protection "buyer" has to pay that premium amount. In case the underlying amount is set as default, the buyer will deliver this receivable amount to the seller who will in turn pay the ‘par amount’ back to the buyer.

When we speak of credit cost, it is the extra or surplus amount over the borrowed or credited amount that the borrower will have to reimburse. That amount will essentially include the interest, arrangement fees and other charges (if applicable). Some of those expenses are mandatory to be paid to the lender as an inseparable part of the agreement that was agreed upon. However, there are certain expenses, credit insurance costs which may or may not be included with the amount.

However, interest & other related charges may be incorporated within the amount in a variety of ways. But irrespective of the way they are incorporated, they must abide by the APR or the Annual Percentage Rate.