It may be tempting to consider the credit card in your wallet an asset, especially if the card-issuing institution grants you a very high line of credit. But the plastic -- and the cash it conveys -- are far from being yours, and you must exercise financial prudence and sound debt management when using it.
With a credit card, you can purchase goods and services up to the limit the bank has granted you. The card allows to buy goods and not pay up front, deferring the payment to a later date, when you remit funds to the card-issuing company. Before issuing a credit card, the lender checks the prospective holder’s financial profile and credit score.
An asset is a resource you use to operate and reach personal goals. Examples include cash and real estate. A credit card is not an asset, because the money on the card -- the credit line - -is not yours. For businesses, assets come in different shapes and sizes. Corporate accountants call "short-term assets" resources such as accounts receivable and inventories, because companies are more likely to use them within one year. By contrast, organizations use long-term resources for many years. Examples include real property, manufacturing equipment and computer hardware.
A debt is a sum of money a borrower must repay on a specified date. Examples include mortgages, student loans and tax assessments. An untapped credit card is not a liability; you’re only liable if you use the plastic to purchase goods and services. In that case, you owe the tapped portion of your credit line -- that is, the outstanding balance of the funds you used. Businesses often use credit cards to pay for mundane expenses.
A credit card is not an asset, but both concepts can interrelate in economic activities. For example, you can use a credit card to purchase gardening equipment valued at $500. By doing so, you simultaneously incur a debt and own an asset. You still have to pay the bank the $500 charged on the card, as well as interest based on the card's annual percentage rate, or APR.
Regulatory and Economic Considerations
Public officials encourage lending practices that foster economic productivity and help citizens reach their lifestyle goals. Credit-card lending, along with personal loans and lines of credit, enable individuals to pay for goods and services and to settle outstanding debts down the road. To prevent illegal lending policies, the government attempts to put into place sound procedures to monitor consumer lending, including limits on APRs that banks can impose on credit-card balances.
- Board of Governors of the Federal Reserve System: Credit Cards Glossary
- NetMBA: The Accounting Process (The Accounting Cycle)
- Principles of Accounting; Chapter One; Welcome to the World of Accounting; Larry M. Walther
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Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.