Credit is: Definition, Principles, Types, and How to Apply for Safe Credit

Jakarta, Pintu News – Credit is one of the most commonly used financial instruments in modern economic activities, both by individuals, businesses, and institutions. In practice, credit plays an important role in encouraging consumption, investment, and economic growth. A proper understanding of the concept of credit is crucial so that people can utilize it wisely and responsibly.

What is Credit According to Law and Experts

According to Law of the Republic of Indonesia Number 10 of 1998 concerning Banking, credit is the provision of money or bills that can be equated with it based on an agreement or borrowing agreement between a bank and another party. The borrower is required to repay the debt after a certain period of time with interest. This definition emphasizes the element of trust and the obligation to repay.

Academically, financial experts define credit as the transfer of the right to use funds from the creditor to the debtor in exchange for certain rewards. Credit is seen as a legal and economic relationship that contains risk, thus requiring a feasibility analysis before it is granted. Trust is the main foundation in every credit transaction.

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Essential Elements of Credit

Credit has several key elements that distinguish it from other financial transactions. The first element is trust, which is the creditor’s belief that the debtor is able and willing to return the borrowed funds. Without this element, credit cannot be established.

The next element is time, because credit always has a certain period of time. In addition, there is an element of risk arising from the possibility of default. The last element is the achievement or object of credit, which is usually in the form of money or other financial facilities that have economic value.

Functions and Objectives of Credit

The macro function of credit is to encourage economic growth through increased production and consumption activities. Credit allows idle funds to be allocated to the productive sector. Thus, credit acts as a means of distributing funds in the financial system.

From a micro perspective, the purpose of credit is to help individuals or businesses fulfill needs that cannot be met with their own funds. Credit also aims to improve welfare, expand business, and accelerate the achievement of financial goals. However, these goals must be balanced with a realistic ability to pay.

5C and 6C Principles in Lending

In banking practice, credit analysis generally uses the 5C principle. This principle includes Character, Capacity, Capital, Collateral, and Condition of Economy. These five aspects are used to assess the feasibility and risk of prospective debtors.

In addition to 5C, some institutions also apply the 6C principle by adding Constraint. Constraint refers to legal, regulatory, or other conditions that may affect a debtor’s ability to fulfill their obligations. These principles help creditors minimize the risk of non-performing loans.

Types of Credit Based on Purpose and Term

Based on its purpose, credit can be divided into consumptive credit and productive credit. Consumptive credit is used to fulfill personal needs such as a house or vehicle. Meanwhile, productive credit is used for business and investment activities.

Based on the tenor, loans are divided into short, medium, and long-term loans. Short-term loans usually have a tenor of less than one year. Long-term loans can have a tenor of more than five years and are generally used for financing large-value assets.

How Credit differs from Financing and Online Loans

Credit generally refers to facilities provided by banks with interest in return. Meanwhile, financing is often used in the context of Islamic financial institutions and uses the principle of profit sharing or certain contracts. This difference lies in the mechanism of return and its legal basis.

Online lending or fintech lending is a form of lending based on digital technology. The process is relatively quick, but often comes with higher interest and fees. In addition, the level of consumer protection is highly dependent on the legality of the lender.

Tips for Applying for Safe Credit and Understanding Interest Costs

Before applying for credit, prospective debtors need to objectively assess their financial capabilities. The ratio of installments to income should be maintained so as not to burden finances. Comparing interest rates and administration fees between institutions is also highly recommended.

Make sure the loan is applied to an authorized institution and supervised by the relevant authorities. Understand all the terms of the credit agreement, including the effective interest rate, late fees, and other additional costs. Discipline in paying installments is the key to prevent credit from turning into a financial burden.

Conclusion

Credit is a financial instrument that plays an important role in modern economic life. By understanding the meaning, elements, principles, and types of credit, people can utilize this facility more wisely. Proper, safe, and measured use of credit will provide optimal benefits without incurring excessive financial risks.

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Reference

• Financial Services Authority. Law Number 10 of 1998 on Banking. Accessed February 3, 2026