Credit

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Domestic credit to private sector in 2005

Credit is the provision of resources by one party to another party where that second party does not reimburse the first party immediately thereby generating a debt and instead arranges either to repay or return those resources of equal value at a later date. The first party is called a creditor also known as a lender while the second party is called a debtor also known as a borrower.

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.

Credit need not necessarily be based on formal monetary systems. The credit concept can be applied in barter economies based on the direct exchange of goods and services and some would go so far as to suggest that the true nature of money is best described as a representation of the credit-debt relationships that exist in society .

Credit is denominated by a unit of account. Unlike money 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 of the notional amount to be referenced while the protection "buyer" pays this premium and in the case of default of the underlying delivers this receivable to the protection seller and receives from the seller the par amount .