Importance of Money & Credit in our life

Economics is the study of the circulation of money in the market. In order to understand economics properly, we first need to understand the terms of the subject. Money and credit are two of the most commonly used terms in economics and are quite literally the basis of the entire study.

What is Money?

Money is any item or electronic record that can be used for the purchase of goods, provide a store of account and can be used as a medium of exchange.

If you buy on a debit card, you are using actual money in your bank account. You have a certain amount, and once your bank account is empty, you can’t spend any more money. People will accept your money as legal tender in that country.


Digital Money which is in form of the amount you may carry in your e-wallet, such as Paytm, Amazon Pay, Mobikwik etc. With the augment of technology, the nature of money has also drastically changed. Initially, we used coins and paper notes to purchase goods and services. Although this form of currency is still available and sufficiently circulated in the market. The market has seen a steady rise in other forms of Digital payments.

Function of Money

Which function is the most important? Money has three functions: as medium of exchange, as a unit of account, and as a store of value. A medium of exchange is what people trade for goods and services.

1. Medium of exchange: 

Money can be used for buying and selling goods and services. If there were no money, goods would have to be exchanged through the process of barter (goods would be traded for other goods in transactions arranged on the basis of mutual need). For example: If I want to buy Bread and want to sell onions, I would have to find a person who is willing to sell Bread for my Onions. Such arrangements are often difficult. But Money eliminates the need of the double coincidence of wants.

2. Unit of account: 

Money is the common standard for measuring relative worth of goods and service.

3. Store of value: 

Money is the most liquid asset (Liquidity measures how easily assets can be spent to buy goods and services). Money’s value can be retained over time. It is a convenient way to store wealth.

Forms of Money

As already mentioned, money comes in several forms, not just the paper currency. Let us find out what are the different forms in which money circulates in the market.

Bank Deposit

Most of the people need only some currency for their daily needs. Rest of the amount is usually kept as deposit in banks. Money which is kept in a bank is safe and it even earns an interest. One can withdraw money from his account as and when required. Since deposit in the bank account can be withdrawn on demand, these deposits are called demand deposits.

One can use a cheque; instead of cash to settle payments. Moreover, one can also buy a demand draft from a bank to make payments.

Cheque

A cheque is another form of money. At times we do not have cash in our hands, or the transaction is of a hefty sum that cannot be given in cash money, in that situation, a person can write a cheque in the name of the bearer. The bearer can present the cheque to the concerned bank and get the money either in cash or have it deposited in his or her bank account. This form of money is attached to your bank deposits. You must have a bank account before you can use a cheque.

Credit

Banks keep a small proportion of their deposits as cash with themselves. This is usually 15% of their deposits as cash. This amount is kept as provision to pay the depositors who may come to withdraw the money on any day. This amount is enough because only a small fraction of people come to withdraw money on a given day. The rest of the amount is used by the banks to give money on credit to people who need the credit. A bank charges interest on the loan which it gives to its creditors. The interest rate charged by a bank no loans is higher than the interest rate given by it on deposits. Thus, interest is the main source of income for banks.

Credit Cards

Another form of money is credit cards. Credit/Debit Cards: Now-a-days, credit/debit cards are in vogue. A debit card allows you to make payments from the amount which is lying in your bank account. A credit card, on the other hand, provides money on credit. Payment through credit/debit card is done electronically and this removes the need of carrying cash.

In both the cases, money and credit are circulated in the market generating more money and assisting in development. Therefore it is important to understand the concept of money and credit. It is this money and credit that helps us in improving our economy further.

Types of Credit

All credit is not created equal. There are many forms of credit available, and getting familiar with credit types can help you become a better credit consumer.

Secured: 

With this kind of credit, the creditor guarantees that it will be paid back by putting a lien on an asset you own. The lien entitles the creditor to take the asset if you don’t live up to the terms of your credit agreement. Car loans, mortgages, and home equity loans are common types of secured credit.

Unsecured: 

When your credit is unsecured, you simply give your word to the creditor that you will repay what you borrow. Credit card, medical, and utilities bills are all examples of unsecured credit.

Revolving: 

If your credit is revolving, the creditor has approved you for a set amount —your credit limit — and you can access the credit whenever you want and as often as you want. In return, you must pay the creditor at least a minimum amount on your account’s outstanding balance each month. Credit cards and home equity lines of credit are examples of revolving credit.

Instalment: 

With instalment credit, you borrow a certain amount of money for a set period of time and you repay the money by making a series of fixed or instalment payments. Examples of instalment credit include mortgages, car loans, and student loans.

Solved Question For You

Q. RBI released Rs 500 currency note in _____.

a. June 1989 b. October 1997

c. May 1995 d. June 1998

Ans: b. October 1997

• The ₹500 banknote denomination was first introduced by the RBI in October 1997
• The note prominently featured the portrait of Mahatma Gandhi instead of the Emblem of India, the Lion Capital of Sarnath.
• On 8 November 2016, the Government of India announced the demonetisation of all ₹500 and ₹1000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new ₹500 and ₹2000 banknotes in exchange for the demonetised banknotes