What is credit in terms of financial transactions?

Credit in the context of financial transactions refers to the ability to make purchases by borrowing funds rather than using cash on hand. When someone uses credit, they are essentially borrowing money, often from a financial institution or credit provider, to pay for goods, services, or other expenses. The borrower is expected to repay the borrowed amount, usually over time, and often with interest.

Using credit enables individuals to make larger purchases than their current cash reserves would allow, illustrating its importance in personal finance. This access to funds can facilitate immediate buying power, which can be particularly useful for significant expenses like a car or home where it may not be practical to pay the full amount upfront. This concept aligns with the idea of building and managing one's credit history, which becomes crucial for future borrowing and financial opportunities.