letter of credit: see credit, letter of.

credit, letter of, commercial instrument through which a bank or other financial institution instructs a correspondent institution to advance a specified sum of money to the bearer. The document is called a circular letter of credit when it is not addressed to any particular correspondent. In effect, a letter of credit is a draft, save that the amount is merely stated as a maximum not to be exceeded. Letters of credit, mainly used by travelers, greatly simplify nonlocal business transactions. Those who issue such letters are usually so well known that any bank will honor the letter upon proper identification. Travelers' checks are a modified form of a letter of credit. They are issued in coupons, upon whose face a value is usually expressed in terms of the currency of a particular country. In the United States they are issued by express companies and banks. Circular letters of credit require that each payment, as it is made, be endorsed by the firm making payment so that other banks may know how much of the total credit has been used.

credit union, cooperative financial institution that makes low-interest personal loans to its members. It is usually composed of persons from the same occupational group or the same local community. Funds for lending come from the sale of shares to members and from the members' savings deposits. Cooperative banking originated in Germany in the middle of the 19th cent.; it was developed by Hermann Schulze-Delitzsch and later was particularly adapted to rural communities by F. W. Raiffeisen. In the United States, the Credit Union National Association (founded 1934) has been instrumental in organizing credit unions. Credit unions are important because they provide loans to blue-collar workers and small farmers, who would otherwise have difficulty securing credit at reasonable interest rates. Under provisions of the Credit Union Act of 1934, U.S. credit unions are chartered by their respective states or by the federal government.

credit card, device used to obtain consumer credit at the time of purchasing an article or service. Credit cards may be issued by a business, such as a department store or an oil company, to make it easier for consumers to buy their products. Alternatively credit cards may be issued by third parties, such as a bank or a financial services company, and used by consumers to purchase goods and services from other companies. There are two types of cards—credit cards and charge cards. Credit cards such as Visa and MasterCard allow the consumer to pay a monthly minimum on their purchases with an interest charge on the unpaid balance. Charge cards, such as American Express, require the consumer to pay for all purchases at the end of the billing period. Consumers may also use bank cards to obtain short-term personal loans (including "cash advances" through automated teller machines). Credit card issuers receive revenue from fees paid by stores that accept their cards and by consumers that use the cards, and from interest charged consumers on unpaid balances.

Diners Club became the first credit card company in 1950, when it issued a card allowing members to charge meals at 27 New York City restaurants. In 1958, Bank of America issued the BankAmericard (now Visa), the first bank credit card. In 1965, only 5 million cards were in circulation; by 1996, U.S. consumers had nearly 1.4 billion cards, which they used to charge $991 billion in goods annually.

The growth of credit cards has had an enormous impact on the economy—changing buying habits by making it much easier for consumers to finance purchases and by lowering savings rates (because consumers do not need to save money for larger purchases). Oil companies, car makers, and retailers have also used the cards to market their goods and services, using credit as a way of encouraging consumers to buy. Concern has been voiced over widespread distribution of bank credit cards to consumers who may not be able to pay their bills; costly losses and theft of cards; inaccurate (and damaging) credit records; high interest rates on unpaid balances; and excessive encouragement of consumer debt that has cut savings in the United States.

Technology advances have facilitated the use of credit cards. Merchants are now connected to banks by modem, so purchases are approved rapidly; on-line shopping on the Internet is possible with credit card payment. Credit card companies are also experimenting with smart cards that would act like a small computer, storing account and other information necessary for its use. An alternative to credit cards is the debit card, which is used to deduct the price of goods and service directly from customers' bank balances.

credit, granting of goods, services, or money in return for a promise of future payment. Most credit is accompanied by an interest charge, which usually makes the future payment greater than an immediate payment would have been. The credit system is founded upon the lender's confidence in the borrower or in his collateral and general possessions. Credit may be classified according to the industry using it, its quality or liquidity, or the length of time for which it is extended. Basically there are two kinds, business and consumer. The chief function of business credit is the transference of capital from those who own it to those who can use it, in the expectation that the profit from its use will exceed the interest payable on the loan. Thus business credit increases the productive power of capital. Consumer credit permits the purchase of retail commodities without the use of cash or with the use of relatively little cash. It is estimated that some 90% of all wholesalers' and manufacturers' sales, and more than 30% of all retail sales are made on a credit basis. In the larger banks, credit-analysis departments determine the amount of credit that may safely be given to loan applicants. Data as to credit risk are supplied by agencies organized for that purpose. The chief agency in the United States is Dun and Bradstreet, formed by a merger (1933) of R. G. Dun & Company (1841) and the Bradstreet Company (1849). If more credit is granted than the community can liquidate, there is inflation; if too little is granted, there is deflation. A lack of business confidence may cause credit to dissolve, thereby contributing to economic crises, panics, and depressions. In bookkeeping, the credit side is the side of the account on which payments are entered; hence, the term credit is sometimes applied to the payments themselves. See credit card; debt; debt, public; installment buying and selling.

Social Credit, economic plan in Canada, based on the theories of Clifford Hugh Douglas. The central idea is that the problems fundamental to economic depression are those of unequal distribution owing to lack of purchasing power. To solve these difficulties Douglas proposed a system of issuing to every citizen dividends, the amount of which would be determined by an estimate of the nation's real wealth; the establishment of a just price for all goods would be the result. The program became highly influential in Alberta during the depression years, and the Social Credit party, led by William Aberhart, won a resounding victory in the provincial elections of 1935. The program included distribution of a social dividend of $25 a month, but it proved impossible to put this scheme into practice. Attempts to tax banks and to enter on currency schemes were declared unconstitutional by the courts. Nevertheless, the party remained in power in Alberta until defeated in 1971. In the federal parliament, the party retained 6 seats until 1980, when it lost them all. The Social Credit party that continues in British Columbia diverged from the doctrines of the original party early on.

Farm Credit Administration (FCA), an independent agency of the executive branch of the federal government that supervises and regulates the Farm Credit System (FCS) for American agriculture. The Farm Credit Act of 1971, which superseded all previous legislation, authorizes the FCS to provide long-term and short-term credit to farmers and their cooperatives. Long-term mortgage loans help farmers acquire property or refinance existing debts; short-term loans are needed to finance crop and livestock production and marketing. In addition, the FCS makes emergency crop and feed loans to farmers who cannot obtain funds from other sources. Legislation in 1985 separated the FCA from the FCS and made the FCA a regulatory body with respect to the FCS.

Credit used by farmers and cooperatives is provided in the FCS through a network of farm credit banks, federal land bank associations, production credit associations, and banks for cooperatives. The farm credit banks make loans to agricultural cooperatives for periods ranging from six months to three years. The loans are secured by warehouse receipts for crops or by liens on livestock. The land banks function as credit wholesalers, raising funds in the investment markets through the sale of bonds and lending the money to farmers at low interest rates. Production credit associations finance short-term credit associations, and banks for cooperatives finance cooperative marketing. Other components of the FCS include the Agricultural Credit Bank, agricultural credit associations, and federal land credit associations.

History

The origins of FCA and FCS date to 1916, when the Federal Farm Loan Bureau, the Federal Farm Loan Board, and Federal Land Banks were established in response to farmer requests for liberal credit facilities and low interest rates. A system for mortgage credit was created; 12 regional farm land banks were set up, with most of the original capital supplied by the government. It was intended that the farmer-borrowers should ultimately own the banks. An act of 1923 further extended federal aid to farmers, establishing 12 intermediate credit banks (one in the district of each land bank), with capital supplied by the government.

Six years later the whole structure of the land banks was severely hit by the Great Depression, with falling prices of farm products, increased debt delinquencies, and decline in the value of farms. In 1932 the government invested $125 million in the bonds of the land banks to bolster them and thus again became the majority stockholder. All then existing federal agricultural-credit organizations were unified into one agency, the FCA, by executive order in 1933. Congress authorized that agency to extend the system of farm-mortgage credit. Funds were made available for loans on easy terms for first or second mortgages—the so-called land bank commissioner loans—to debtors whose collateral was so low in value or so encumbered by debt as to make refinancing by the land banks unfeasible. The FCA was also authorized to establish 12 production credit corporations and banks for cooperatives. The result was a centralized source of farm credit.

A part of the Dept. of Agriculture after 1939, the FCA again became an independent agency in 1953. During the farm crisis of the 1980s, the Farm Credit Amendments Act (1985) gave the FCA more regulatory authority over the farm credit system and established a full-time FCA board of three persons, who are appointed for six-year terms. The Agricultural Credit Act (1987) established the Farm Credit System Insurance Corporation, the Federal Agricultural Mortgage Corporation (Farmer Mac), and other institutions to strengthen the FCS.

Commodity Credit Corporation: see agricultural subsidies.

Credit cooperative formed by a group of people with some common bond who, in effect, save their money together and make low-cost loans to each other. The loans are usually short-term consumer loans, mainly for automobiles, household needs, medical debts, and emergencies. Credit unions generally operate under government charter and supervision. They are particularly important in less developed countries, where they may be the only source of credit for their members. The first cooperative societies providing credit were founded in Germany and Italy in the mid-19th century; the first North American credit unions were founded by Alphonse Desjardins in Lévis, Quebec (1900), and Manchester, N.H. (1909). The Credit Union National Association (CUNA), a federation of U.S. credit unions, was established in 1934 and became a worldwide association in 1958.

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Small card that authorizes the person named on it to charge goods or services to his or her account. It differs from a debit card, with which money is automatically deducted from the bank account of the cardholder to pay for the goods or services. Credit-card use originated in the U.S. in the 1920s; early credit cards were issued by various firms (e.g., oil companies and hotel chains) for use at their outlets only. The first universal credit card, accepted by a variety of establishments, was issued by Diners' Club in 1950. Charge cards such as American Express require cardholders to pay for all purchases at the end of the billing period (usually monthly). Bank cards such as MasterCard and Visa allow customers to pay only a portion of their bill; interest accrues on the unpaid balance. Credit-card companies get revenue from annual fees and interest paid by cardholders and from fees paid by participating merchants.

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Organization that provides information to merchants or other businesses concerning the creditworthiness of their customers. Credit bureaus may be private enterprises or may be operated on a cooperative basis by the merchants in one locality. Users of the service pay a fee and receive information from various sources, including businesses that have granted the customer credit in the past, public records, newspapers, the customer's employment record, and direct investigation.

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Transaction between two parties in which one (the creditor or lender) supplies money, goods, services, or securities in return for a promised future payment by the other (the debtor or borrower). Such transactions normally include the payment of interest to the lender. Credit may be extended by public or private institutions to finance business activities, agricultural operations, consumer expenditures, or government projects. Large sums of credit are usually extended through specialized financial institutions such as commercial banks or through government lending programs.

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Short- and intermediate-term loans used to finance the purchase of commodities or services for personal consumption. The loans may be supplied by lenders in the form of cash loans or by sellers in the form of sales credit. Installment loans, such as automobile loans and credit-card purchases, are paid back in two or more payments; noninstallment loans, such as the service credit extended by utility companies, are paid back in a lump sum. Consumer loans usually carry a higher rate of interest than business loans. Seealso credit.

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Short-term credit instrument consisting of a written order that requires a buyer to pay a specified sum to the seller at a given date, signed by the buyer as a promise to honor the obligation. Acceptances are often used in export/import transactions: an exporter may require a buyer to sign and return an acceptance, which the exporter can then sell to the bank at a discount, thereby obtaining payment promptly. The buyer then has until the bill's maturity date to dispose of the goods and pay the promised sum (now owed to the bank). Seealso bill of exchange; promissory note.

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