What is a Credit in Accounting?

A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned to the right in an accounting entry. A credit is recorded on the right side of a T account.

What is a Credit in Finance?

A credit also refers to a delayed payment arrangement. For example, a customer is granted $10,000 of credit on 30 day terms, which means that the customer can make purchases of up to $10,000 without having to pay the seller until 30 days have passed. This provides a substantial benefit to the customer, which has the opportunity to sell the acquired goods at a markup and use the collected funds to pay back the seller without using any of its own cash to fund the transaction. Here are several variations on the credit concept in finance:

Installment credit. A fixed loan amount is borrowed and repaid over a predetermined period with regular installments.
Open credit. Borrowers must pay the full balance within a specified time frame; not typically extended by traditional lenders.
Revolving credit. Allows borrowers to access a fixed credit limit that they can use, pay back, and use again in a revolving cycle.
Secured credit. Credit that requires the borrower to provide collateral that the lender can claim if the borrower defaults.
Unsecured credit. Credit that doesn’t require collateral, so lenders base approval on the borrower’s creditworthiness.