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What Is Credit?
There are many different kinds of credit: auto loans, home loans, credit cards, and so forth. Each is different in its own way and has its own rules for how it works, but they all share one thing in common: you are borrowing someone else’s money and are essentially promising to pay it back at some future date (plus interest–which we will cover in more detail later in this reading). Thus, the most basic definition of credit would be: money borrowed from someone else with a legal obligation to pay them back in the future. We call this legal obligation to pay the lender back a “debt”.
For example, let’s look at a car loan: the lender loans you the $10,000 that you need in order to purchase the vehicle; once you receive this money you incur an obligation to pay that $10,000 back to the lender at some future date. In this case, we would say that you have a $10,000 debt.
Consider the following: every time somebody swipes their credit card to pay for goods or services, they aren’t spending their own money, per se. They are actually borrowing someone else’s money in order to pay for the transaction. In doing this, they incur a debt, or an obligation to repay the borrowed money at some future date.
As I said earlier, there are many kinds of credit and we won’t be going into the details of how they differ in this article. For now, just understand that credit is borrowed money that carries a legal obligation to be repaid.