1 / 17

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.

atara
Download Presentation

Credit Management

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  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

More Related