Posted by: John S Kiernan

“Credit” has three definitions in the context of personal finance. It can refer to a system of commerce, one’s standing within that system or, in the accounting sense, funds that one receives.

We’ll explain each definition in more detail below.

1. System of Commerce

Credit allows us to buy now and pay later, using borrowed money to complete transactions. In exchange for the money supplied on “credit,” a lender can charge interest and fees. This also helps to offset the lender’s risk.

This system manifests itself in a number of different credit instruments. They include:

Credit Instrument	Explanation	Example
Revolving Credit	An account with a maximum spending limit and a minimum monthly payment, allowing a balance to be carried from month to month.	Most credit cards
Charge Card	An account with No Preset Spending Limit whose bill must be paid in full each month. It does not offer a grace period.	Many American Express rewards cards
Service Credit (unrelated to retirement benefits)	Services provided in advance of payment, thus requiring a credit check.	Utilities and cell-phone service
Installment Credit	A loan or line of credit for a specific amount, which typically must be repaid with interest in specified monthly allotments.	Auto loans and mortgages

2. Credit Standing / Creditworthiness

Credit can refer to a person’s or company’s standing within the overall system of lending and borrowing. In this sense, credit is measured by the contents of reports maintained by the major credit bureaus. And that information is quantified in the form of credit scores.

So if someone was to ask how good your credit is, for instance, he or she would likely be referring to the category it falls under: Excellent, Good, Fair/Limited or Bad. And answering would be as simple as checking your latest credit score for free on WalletHub.

3. The Budget Definition

Credit in the context of accounting refers to funds that you receive. The opposite of a credit is a “debit,” which refers to a payment that you make. A paycheck deposited to your bank account would be an example of a credit on your household’s balance sheet. Your credit-card payment would be a debit.

Odds are this final financial definition for credit is a bit less familiar to many folks, considering that only 40% of U.S. adults “have a budget and keep close track of their spending,” according to the National Foundation for Credit Counseling. But you can learn more about the accounting definition of this term from our Guide to Credits vs. Debits.

Final Thoughts

For more information on all things credit, check out WalletHub’s Education Center or pose a question to our community of experts. You can also keep tabs on your credit by signing up for a free WalletHub account. You’ll get free daily credit scores and reports, personalized money-saving advice, and 24/7 credit monitoring.     Image: Franz Wilhelm Franzelin / iStock.

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