What Is A Credit Instrument?

A credit instrument is a term used in the banking and finance world to describe any item agreed upon that can be used as currency.  Banks issue credit instruments, in the form of credit cards.  Customers, in turn, use these credit instruments to make purchases 'on credit' and pay the amount 'borrowed' back to the bank either at the end of the month, quarter, or whatever term has been agreed upon.

Any item can serve as a credit instrument, so long as both parties (the borrower and the lender) have agreed on the use of that instrument.  The instrument is basically a promise by the debtor that he/she will pay back the debtor.

A simpler example of a credit instrument is the cheque.  When one person gives another a cheque, he/she is basically saying that this piece of paper proves I owe you a certain amount of cash, and if you take it the bank, they will gladly pay you on my behalf.  Even simpler than the cheque is the promissory note, which is also very similar in nature.

Credit instruments are ever popular due to their convenience by not having you carry around piles of cash everywhere you go.

A credit instrument is nothing but a payment system established in the business, recognized by the country's legal and financial institutions. Success and implementation of said instrument largely depend upon the active support of the banks. Out of the several existing credit instruments, the personal check system and the documentary credit systems are widely being utilized. A promissory note or written evidence of a debtor's obligation is also considered as the credit instrument.

The personal check system ensures a payment order to be paid by the bank upon production of the check issued to some organization or individual against the bank's credit. Maker, drawer, bank, payee, bearer, etc. constituent the organizing machinery of the check credit instrument which is further classified as the negotiable instrument (does not mean, it can favor anyone!). Based upon the operating and payment conditions, there exist different kind of checks, such as the cashier's check (hard to get), certified check, electronic check (may give easy money), QChex, etc.

The documentary credit system employs primarily the Letter of Credit (LC) and Back-to-Back Letter of Credit as its main constituent parts. These credit operations require production of some pre-defined documents, such as Way Bills, Bills of Lading, Certificate of origin, Insurance papers, Customs forms, etc. for clearing the payment. Purchase and payment services of the domestic and international businesses use the documentary credit system indiscriminately.