An image of the word "Credit" written out in white

What is the Meaning of Credit in Banking?

Milad Hassibi December 18, 2018

When it comes to banking, many consumers are still unclear of the definition of credit.

A credit in banking is an entry or log that increases a certain liability or obligation you have or increases an equity account holding. An example if this would be an auto loan. A credit can also be used to describe a decrease in an asset or an expense-related account.

Credit in Banking Definition

Anytime an accounting-based transaction occurs, two accounts will always become impacted. One of the accounts will receive a credit while the other receives a debit. There can be more than two accounts affected, but always a minimum of two accounts that receive either a debit or a credit entry.

A man hands in a form with a credit icon in white next to him

Depending on the type of account, the definition of credit may change.

Asset accounts, such as a savings account or a mutual fund, will experience a decrease in their balance when a credit is applied. With an equity account, such as a ownership stake, a credit will increase your total balance. Lastly, with a liability account, such as accounts payable, a credit will increase the balance or liability.

All organizations have different accounting methodologies, but all rely on one proven equation, which is:

Assets = Liabilities + Owners Equity

This equation is used to ensure that all credit and debit related entries are recorded correctly, as each credit will have a corresponding debit attached to it. As a rule of thumb, debits always go onto the left side of the column while a credit always goes to the right side. There are no exceptions to this accounting law.

In most business transactions, you will only have an asset if you used a liability or equity to pay for it. This is reflected in the debit and credit portion of a balance sheet.

Final Note

All in all, a credit in banking increases a liability or obligation you or your business has. It can also be used to describe an increase in an equity account or equity stakeholding. Depending on the type of account, a credit can have a variable impact.

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