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Money and credit: All you need to Know Research Team | Posted On Wednesday, February 06,2019, 04:31 PM

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Money and credit: All you need to Know



What is money and credit?

Money is a medium of exchange that enables the user make transactions and buy goods and avail services. Money is freely transferable across all sectors and segments. The supply of money in the economy decides the purchasing power of people and guides price stability leading to control of inflation. Money supply in the economy is controlled by the RBI from time to time using various monetary instruments like CRR and SLR.

Credit is virtual money that banks offer borrowers in the form of loans. Credit can be carried in multiple forms like credit cards and loans. Credit is the money borrowed from a bank or lender based on the promise that the money will be paid back in future along with interest. The flow of credit in an economy controls the money supply. Therefore the flow and availability of credit is controlled and monitored by RBI to control the money supply in an economy.

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What is credit in economy?

Banks generally maintain a limited amount of physical cash which amounts to 15% of their deposits. This cash is used in daily transactions as customers withdraw money. The amount of money is enough as only a small fraction of bank customers come to withdraw money on any given day. The remaining is in the form of credit. Banks give credit to people in the form of loans. An interest rate is charged on the loans given by the banks.

Difference between money and credit:

Money and credit both offer purchasing power. The key differences between money and credit are as follows:

  • One of the main differences between money and credit is that money is what enables you to buy goods and avail services. Credit is the money borrowed from banks/lenders to pay for the goods and services.
  • Money is the amount of cash you have to make transactions. Credit is borrowed money. Credit does not come free. The bank or the lending institute chargesto lend to borrowers. This is called interest. So you not only pay back the money, but also the interest.
  • Money always comes in the form of cash. But credit does not always come in the form of cash. Credit is a liquid form of money that can be carried in other forms as well like credit cards.
  • It can take some time to save up enough money for a big purchase, like a car. One of the benefits of using credit is that you can buy the car you want now, even if you don’t have the cash saved up yet.
  • If you are going to use credit, it’s important to know how much credit will cost you until you pay it back. Money is free from any such interest.

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Credit to get money:

Creditcan be readily converted into cash. Banks provide instruments like credit cardsto carry credit. You can make use of them to withdraw cash or make transactions without cash. But there is a slight difference in withdrawing money from credit card and debit card. If you withdraw cash from your debit account then you do not have to worry about interest or repayment. This is because the money in your debit card comes from the money you deposited in your bank’s savings account.

Whereas borrowing money by using credit card is different. Your bank fixes a credit limit based on credit worthiness (This includes salary and eligibility criteria). The credit limit is the maximum amount of money you can borrow using your credit card. The money borrowed is known as cash advance as you have to pay the money back at a later date. If you fail to pay back on the given date, you will be charged interest on the borrowed amount. Using credit card involves no cash transactions and the entire process is carried out electronically.

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Example of Money and Credit:

Examples of money are the physical form of cash that can be carried in your wallet, to pay for goods and services. Initially, coins had beenintroduced as medium of exchange. Paper money later replaced coins. Currently paper currency is of a higher denomination ranging from Rs10 to Rs2000 and coins are of a smaller denomination ranging from Rs1 to Rs10. The currency notes and coins are issued by the RBI (Reserve Bank of India).

Creditis the money borrowed to pay for goods and services that must be repaid in the future.There are many forms of credit like Loans, credit cards and so on.

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