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Credit Management

Credit Management. 5.01 Understand credit management. Main Types of Credit. Credit : An agreement to obtain money, goods or services now in exchange for a promise to pay in the future Main Types of Credit Charge Accounts Credit Cards Installment Credit Consumer Loans. Charge Accounts.

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Credit Management

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  1. Credit Management 5.01 Understand credit management.

  2. Main Types of Credit • Credit: An agreement to obtain money, goods or services now in exchange for a promise to pay in the future • Main Types of Credit • Charge Accounts • Credit Cards • Installment Credit • Consumer Loans

  3. Charge Accounts • A charge account represents a contract between creditors and debtors. Charge accounts allow debtors (customers) to receive goods or services from suppliers (creditor) and pay for them at a later date. • Examples • Regular Accounts • Budget Accounts • Revolving Accounts

  4. Charge Accounts • Regular Accounts • Requires the buyer to make a full payment within a stated period • Used for everyday needs and small purchases • Example: charge account with an electrician who re-wired a house • Budget Accounts • Requires that a customer make payments of a fixed amount over several months • Example: A charge account with Progress Energy utility company

  5. Charge Accounts • Revolving Accounts • Most popular form of sales credit • Charge purchases at any time, but only part of the debt must be paid each month • A credit limit is set for the maximum amount to be spent • Payments are required once a month, but it doesn’t have to be the FULL payment • A finance charge is added if the total bill is not paid (total dollar amount spent plus interest)

  6. Credit Cards • Credit cards allow debtors (customers) to receive goods and services from suppliers (creditor) using credit cards and pay for them later. • Types of credit cards • Bank • A bank will pay the business (taking liability for payment) • Customers are required to pay a fee for using the credit card • Examples • MasterCard, VISA

  7. Credit Cards • Travel/Entertainment • Pay a yearly membership fee • Expected to pay the full balance each month • Examples: American Express, Diners Club • Oil Company • Examples: BP Oil, Exxon • Retail Store • Cards offered by a particular store • Examples: Belk, Kohl’s

  8. Installment Credit • Installment sales credit is a contract issued by the seller that requires intermittent payments at specified times such as bi-weekly or monthly. • Customers are required to make a down payment which is a portion of the entire purchase. • Most often used for furniture and household appliances • Examples: • Rooms to Go Furniture

  9. Consumer Loans • A consumer loan is when a buyer agrees to make monthly payments in specific amounts over a period of time. • The loaner receives money up front and agrees to pay the price back in full plus interest • The lender needs some assurance that the loaner will pay the money back. • Promissory note • Collateral (property used as security) • Cosigner

  10. Business Advantages for using Credit • Establishing a favorable credit rating • Keeping business separate from personal expenses • Minimizing record-keeping and receipts • Keeping track of what employees are spending • Earning rewards

  11. Business Disadvantages for Using Credit • Experiencing theft of customer records/databases • Overbuying by employees • Overusing credit

  12. Cost of Credit • Interest (I) • The cost of using someone else’s money • Principal (P) • Amount of the loan • Interest Rate (R) • Percent of interest charged or earned • Time (T) • The length of time for which the interest will be charged • Expressed in years

  13. Cost of Credit • Simple Interest • I=P*R*T • Time in Years • Multiply by the number of years • Time in Months • Divide the number of months by 12 • Time in Days • Divide the number of days by 360

  14. Cost of Credit • Installment Interest: When a loan is repaid in partial payments • Calculation: • Calculate out how much interest you owe • I = P x R x T • Calculate the total cost of the loan • Total Cost = P + I • Determine the number of payments • Based on how often you are required to make payments • Generally, you make monthly payments • # payments = # years * 12 [because there are 12 months/yr] • Calculate your payments • Payments = Total Cost / # of payments

  15. Cost of Credit • Decreasing Loan Payments • Interest is calculated on the amount that is unpaid at the end of each month • Calculation: • Interest is calculated on the amount of the loan that is unpaid. • Interest = Unpaid Balance * Interest rate • Remember: The amount of interest is based on the portion of the year. • 1 month is 1/12th of a year • Interest Rate for 1 month = Annual Interest Rate / 12 • Monthly Payment = Interest + Loan Repayment

  16. Cost of Credit • Maturity Date • The date on which a loan must be repaid • Months • The maturity date is the same day of the month that the loan was made • Example: One month loan on January 15 will be due on February 15 • Days • Determine the day the loan was made, and then count the exact number of days of maturity • Example: A 90-day loan made on March 4 will be due on June 2

  17. Cost of Credit • Annual Percentage Rate (APR) • A disclosure required by law on all credit agreements • States the percentage cost of credit on a yearly basis • Also includes service fees

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