The Credit Decision
CREDIT. Trust given or received; expectation of future payment for property transferred, or of fulfillment or promises given; mercantile reputation entitling one to be trusted;—applied to individuals, corporations, communities, or nations; as, to buy goods on credit.
—Webster’s Unabridged Dictionary, 1913 Edition
A bank lives on credit. Till it is trusted it is nothing; and when it ceases to be trusted, it returns to nothing.
People should be more concerned with the return of their principal than the return on their principal.
The word credit derives from the ancient Latin credere, which means “to entrust” or “to believe.”3 Through the intervening centuries, the meaning of the term remains close to the original; lenders, or creditors, extend funds—or “credit”—based upon the belief that the borrower can be entrusted to repay the sum advanced, together with interest, according to the terms agreed. This conviction necessarily rests upon two fundamental principles; namely, the creditor’s confidence that:
The first premise generally relies upon the creditor’s knowledge of the borrower (or the borrower’s reputation), while the second is typically based upon the creditor’s understanding of the borrower’s financial condition, or a similar analysis performed by a trusted party.4