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.

Some of the examples of credit instruments are:

• Credit cards: In which the company issuing the card pays the money for the transaction on behalf of the buyer who pays it back in installments.


• check


• promissory note: A promise to pay at a specified future date


• Bill of exchange


• Banker's acceptance

A Credit Instrument is basically an instrument which as a replacement to money. Almost all businesses and even individuals make use of credit instruments in one way or another.

Following are the different types of credit instruments:

Checks : The value of check is actually underwritten by funds that are in the bank account of the check signatory.

Credit Card: Credit card has become one of the most commonly used credit instruments. A credit card creates a contract between the buyer and the seller. The seller extends credit to the buyer such that the company issuing the card will cover the amount of purchase.

Promissory note: The debtors receive funds from the lenders such that the note will be repaid  at a future point in time. There is normally a specific date for repayment or can also be open ended.

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.

A credit instruments is a term used in the banking and finance world to describe any item agreed 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 purchase on credit and pay the amount borrowed back either at the end of the month quarter or what ever term has agreed, upon.

The open book account
promissory note
trade acceptance