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What Is Credit? by

ding ding.

The bell on the door of the general store rings as Mr Johnson of Johnsons Farm enters.

He needs feed for his horses but last years crop was hit by an infestation of Japanese Beetles.

Manny, the store owner has known the Johnson family for over 20 years. He also knows that this years bumper crop on the farm should cover its losses from last year, and then some.

Its a small town. Word moves fast.

Mr Johnson doesnt have all of the money to feed his horses today, but he will in the weeks to come.

Mr Johnson is an honest man who meets his obligations and cares for his family, his farm and his neighbors with a heart of gold.

Its not a difficult choice for Manny to give him the feed so the Johnsons horses survive, and expect the payment to be returned in full as soon as the next harvest.

Manny writes the debt on a piece of paper and stores it in his cashbox.

In effect, Manny extended him Credit By creating a "contractual agreement in which a borrower (Mr Johnson) receives something of value (horse feed), and agrees to repay the lender at some later date (the next harvest)".

But not so many people are as trustworthy as Mr Johnson.

The town meeting of merchants just last week provided every store owner with a list of names and descriptions, almost a page long, of locals and passersby that hadnt paid their debts on time.

Armed with the list, the store owner could decide for himself, either to deny lending anything to that person, or to ask for something extra in return to cover the store owners risk.

Today we have more advanced systems in place, however the concept is the same.

Before a merchant or bank will lend you something, they will check your history with other merchants to see how well you did at paying those debts back.

In our example, Mr. Johnson has good credit and was an easy choice for a loan.

It's up to you alone to meet payment obligations now to be considered for credit in the future.

For more riveting stories defining What is Credit or to learn how to improve credit scores, visit

What is Credit? A slideshow  

A slideshow about the early days where credit gets its start

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