Credit instruments, such as checks, credit cards, and promissory notes, are used instead of currency. They require an agreement between the debtor and recipient and offer advantages such as not having to carry large amounts of cash and easy replacement if lost or stolen.
Credit instruments are items that are used in place of currency. Almost all people and companies make use of some type of credit instrument on a daily basis. The ability to use such an instrument instead of currency is based on the fact that the debtor and the recipient agree to the use of the instrument and there is a reasonable expectation that the alternative form of payment will be honored.
One of the first forms of a credit instrument is the check. Used by consumers as a legitimate means to pay for goods and services received, the value of the check is written with funds that are placed in a bank account. Upon presentation of the check by the recipient, the bank deducts the specified amount recorded on the check by the debtor. Although the check is no longer the primary credit instrument used in many financial transactions, it is still used by many businesses and individuals.
The credit card is another example of a common credit instrument. Using a credit card to pay for a purchase creates a contract between the buyer and the seller. Essentially, the seller is extending credit to the buyer on the assumption that the card issuing company will cover the purchase amount. In turn, the credit card issuer anticipates that the cardholder will eventually pay the amount owed along with any applicable interest and finance charges.
A third type of credit instrument is the promissory note. With this arrangement, borrowers receive funds from lenders with the understanding that the note will be repaid in full at a future time. This type of debtor’s obligation may carry a specific date for repayment to be indefinite. The promissory notes can be used in the lending of funds between individuals or between two business entities.
There are two main advantages to using a credit instrument. First, the consumer does not have to carry a large amount of money to make purchases. Second, the instrument can usually be replaced relatively easily when the instrument is damaged, lost, or stolen. This is in contrast to cash, which generally cannot be replaced when damaged, stolen, or lost.
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