The origin is from the Latin word, credo: I believe. ‘Creditum’ is ‘a loan, a thing entrusted to another’. It carries an element of trust; a judgment by each party that the other can and will act as they promise.

Any financial transaction involving ‘credit’ involves the loan of money by a third party in exchange for a promise to repay. The party making the promise incurs a debt to be repaid. Credits and debts are two sides of the same coin: the lender’s credit is the borrower’s debt. This symmetry is closely related to the symmetry of balance sheet accounting whereby a credit to an account on one side of the balance sheet is debited simultaneously in the same amount to the related account on the other side of the balance sheet.

The exchange of goods or services for payment is at the foundation of every commercial transaction. Inherent in that exchange is the obligation of the purchaser to compensate the vendor to the level of the agreement struck. A simultaneous exchange of goods/services for cash carries no financial risk to the vendor because there is a tangible and immediate settlement of payment for the good or service purchased. The risk factor lies with the purchaser: that the goods may be defective, or the service not worth what was previously agreed.

All entities—individuals, households, commercial enterprises, charitable organizations, or governments—bear the ultimate financial responsibility for the resources they control. The resources must be paid for and maintained regardless of whether they generate income. Hence, every resource is potentially also a liability.

Generalizing from this point, although there is a tendency to consider credit as something that happens only in financial markets, in reality, all entities and enterprises regardless of size or nature are involved in borrowing and lending, whether implicitly or explicitly.

Credit is an intangible commodity, a mixture of finance, economics, social input and mathematics. Paradoxically, it is not taught in finance courses. One must learn it on the job. In the Post-Crisis environment, learning about credit should not be a haphazard process—especially for credit rating analysts. That is why you are taking Module I.