Credit

Credit

If one wanted to simplify accounting to one equation, it would be: A = E + L, where A stands for assets, E for shareholders’ equity and L for liabilities. Liabilities are money that one owes, or outstanding debt and loans. One example of a liability is a mortgage. While the real estate market has been greatly affected by the subprime mortgage crisis, buying houses, condominiums and other residential properties remains an attractive alternative to renting, for those who can afford it.

So how does it work? Homes and condos can be purchased directly from the owner, but people usually go through a real estate agent. Similarly, a mortgage may be obtained directly from a bank or other financial institution, or through the intermediary of a mortgage broker (some believe it may result in lower interest rates). Usually, there is a down payment, a percentage of the total cost of the property, and the rest is covered by a mortgage, a loan from the bank. As a general rule, banks will only lend money to those with steady jobs, adequate income given the funds to be borrowed, and a good credit history.

Nonetheless, having good credit may result in borrowing too much. For example, someone with an excellent credit rating may be offered credit limits well beyond what they initially planned to spend, maxing out their credit cards or overdraft accounts, and ending up with large debts. Then, unpaid debt could lead to financial woes, such as bad credit and problems with collector agencies.

Alternatively, very small commercial loans are gaining popularity in the developing world, allowing entrepreneurs to start small businesses. The practice is known as microfinance. Clearly, capital and investment are an integral part of most businesses, since a good idea and luck alone are seldom enough without financing, investing and a sustainable cash flow.

Credit is a system whereby a person who can not pay gets another person who can not pay to guarantee that he can pay. (Charles Dickens). Illustration : Megan Jorgensen (Elena)